Stocks Gain on Upbeat Earnings

Charles Schwab; On the Market

Posted: 10/18/2016 4:15 PM ET

Stocks Gain on Upbeat Earnings

U.S. equities finished higher following some favorable Chinese lending data, and a plethora of earnings releases, highlighted by Dow members Goldman Sachs and UnitedHealth, along with Netflix. Treasuries ticked higher following mixed reads on inflation and homebuilder sentiment, gold and crude oil prices gained ground, while the U.S. dollar was little changed.

The Dow Jones Industrial Average (DJIA) rose 75 points (0.4%) to 18,162, the S&P 500 Index added 13 points (0.6%) to 2,140 and the Nasdaq Composite jumped 44 points (0.9%) to 5,244. In moderate volume, 724 million shares were traded on the NYSE and 1.5 billion shares changed hands on the Nasdaq. WTI crude oil inched $0.35 higher to $50.29 per barrel, wholesale gasoline was up $0.02 at $1.51 per gallon and the Bloomberg gold spot price gained $6.79 to $1,262.64 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 97.90.

Dow member Goldman Sachs Group Inc. (GS $173) reported 3Q earnings-per-share (EPS) of $4.88, well above the $3.82 FactSet estimate, as revenues grew 19.0% year-over-year (y/y) to $8.2 billion, topping the expected $7.4 billion. Shares finished higher.

Dow component International Business Machines Corp. (IBM $151) posted 3Q profits ex-items of $3.29 per share, exceeding the expected $3.23, with revenues flat y/y to $19.2 billion, above the anticipated $19.0 billion. However, the company's margins were weaker than expected. IBM reaffirmed its full-year EPS and free cash flow outlooks. Shares were solidly lower.

Dow member Johnson & Johnson (JNJ $115) announced 3Q EPS ex-items of $1.68, north of the projected $1.65, as revenues rose 4.2% y/y to $17.8 billion, compared to the forecasted $17.7 billion. JNJ raised the low end of its full-year earnings outlook and reaffirmed its revenue guidance. Shares were lower amid some analyst uncertainty about JNJ's 2017 outlook and sustainability of its sales growth as its blockbuster arthritis treatment, Remicade faces upcoming generic competition.

Dow component UnitedHealth Group Inc. (UNH $143) reported 3Q adjusted EPS of $2.17, north of the anticipated $2.08, as revenues rose 12.0% y/y to $46.3 billion, topping the expected $46.1 billion. UNH raised its full-year profit outlook and shares were nicely higher.

Netflix Inc. (NFLX $119) posted 3Q EPS of $0.12, double the Street's forecasts, as revenues rose 31.7% y/y to $2.3 billion, roughly in line with estimates. NFLX's 3Q streaming subscriber additions easily topped expectations, led by international, while its 4Q forecast for subscribers exceeded expectations. NFLX surged nearly 20%.

United Continental Holdings Inc. (UAL $54) announced 3Q earnings ex-items of $3.11 per share, above the projected $3.07, with revenues decreasing 3.8% y/y to $9.9 billion, roughly in line with estimates. UAL's passenger revenue metric, a key industry gauge, continued to decline due to the stronger U.S. dollar, lower surcharges, reductions from energy-related corporate travel, and declining yields. UAL was higher.

For analysis of earnings and the stock markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Three Reasons Stocks May Avoid Another Lost Decade, at www.schwab.com/marketinsight, and follow Jeff on Twitter: @jeffreykleintop.

Consumer price inflation mixed, homebuilder sentiment dips 

The Consumer Price Index (CPI) (chart) was up 0.3% month-over-month (m/m) in September, in line with the Bloomberg estimate, while August's 0.2% increase was unrevised. The core rate, which strips out food and energy, ticked 0.1% higher m/m, below expectations of a 0.2% rise and August's unrevised 0.3% increase. Y/Y, prices were 1.5% higher for the headline rate, matching forecasts, while the core rate was up 2.2%, below projections of a 2.3% increase. August y/y figures showed an unrevised 1.1% rise and an unadjusted 2.3% increase for the headline and core rates respectively. For analysis of the inflation environment on the bond markets, see Schwab's Fixed Income Director Collin Martin's, CFA, article titled, Do TIPS Make Sense When Inflation is Low? and follow Schwab on Twitter: @schwabresearch.

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month declined to 63 from September's unrevised 65 figure, matching estimates. Builder confidence remains well above the key 50 mark, which separates good and poor conditions. The NAHB said even with this month's drop, builder confidence stands at its second-highest level in 2016, a sign that the housing recovery continues to make solid progress. However, the NAHB added that builders in many markets continue to express concerns about shortages of lots and labor.

Tomorrow, we will get a look at home construction activity in the form of housing starts and building permits, with starts projected to rise 2.9% m/m in September to an annual rate of 1,175,000 units, while permits are anticipated to increase 1.1% m/m to an annual rate of 1,165,000 units (economic calendar). Also, we will get weekly MBA mortgage applications and the Federal Reserve's Beige Book, an anecdotal look at economic activity across the nation used as preparation tool for the next Federal Open Market Committee (FOMC) monetary policy decision on November 2.

As noted in the recent Schwab Market Perspective: Spinning Our Wheels, after a temporary soft patch in August, economic data has improved. The next couple of weeks will be data heavy and we'll be watching closely to gauge likely Fed policy. For more on our outlook for the housing sector, see Schwab's Director of Market and Sector Analysis, Brad Sorensen's, CFA, article, Real Estate Sector: Marketperform. Read both articles at www.schwab.com/marketinsight.

Treasuries were higher, as the yields on the 2-year note and 30-year bond dipped 1 basis point (bp) to 0.80% and 2.51%, respectively, while the yield on the 10-year note is declined 2 bps to 1.75%. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Europe and Asia see broad-based advances

European equities finished broadly higher, with financials and mining issues leading the way on elevated Fed rate hike expectations, some upbeat Chinese lending data, and as earnings reports in the U.S. were relatively favorable. Also, traders awaited Thursday's monetary policy decision from the European Central Bank. The British pound rallied versus the U.S. dollar following a hotter-than-expected read on the nation's consumer price inflation for September. The euro dipped versus the greenback, while bond yields in the region were mostly lower. With volatility likely to persist, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversificationand why Your portfolio may be less diversified than you think. Read these articles, at www.schwab.com/oninternational.

Stocks in Asia rebounded following some upbeat Chinese lending statistics and a pullback in the Japanese yen late in the session, while casino operators recovered some of yesterday's drop. Mainland Chinese equities and those traded in Hong Kong jumped, after the nation reported stronger-than-expected September figures for new yuan loans and aggregate financing—a gauge of total credit issued. The data comes as China will deliver more key economic reports, headlined by 3Q GDP, projected to showed growth remained at 6.7% y/y. For more on China, see Schwab's Director of International Research Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016, while Schwab's Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape. Read both articles at www.schwab.com/oninternational, and follow Schwab on Twitter: @schwabresearch. Meanwhile, markets in Japan, Australia, South Korea and India all saw solid gains.

In addition to data out of China, the international economic calendar for tomorrow will include Japan's All-Industry index, PPI from South Korea, and employment data from the U.K.

Stocks Able to Hold Gains

Charles Schwab: On the Market

Posted: 10/14/2016 4:15 PM ET

Stocks Able to Hold Gains

U.S. stocks pared a solid morning advance as investors weighed some mixed domestic economic data and an afternoon speech from Federal Reserve Chair Janet Yellen. Treasuries, gold and crude oil prices moved lower, while the U.S. dollar gained ground. Equity news included some quarterly results from a few big banks and HP also issued guidance for 2017. Overseas, a broad-based advance in Europe and Asia developed courtesy of eased global growth concerns as a Chinese inflation report countered the disappointing trade data it previously announced.

The Dow Jones Industrial Average (DJIA) added 40 points (0.2%) to 18,138, the S&P 500 Index was nearly unchanged at 2,133 and the Nasdaq Composite ticked 1 point higher to 5,214. In moderate volume, 792 million shares were traded on the NYSE and 1.6 billion shares changed hands on the Nasdaq. WTI crude oil declined $0.09 to $50.35 per barrel, wholesale gasoline ticked $0.01 higher to $1.49 per gallon and the Bloomberg gold spot price lost $5.98 to $1,252.10 per ounce. Elsewhere, the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.6% higher at 98.09. Markets were lower for the week, as the DJIA lost 0.4%, the S&P 500 Index decreased 0.7% and the Nasdaq Composite was 0.4% lower.

Dow member JPMorgan Chase & Co. (JPM $68) reported 3Q earnings-per-share (EPS) of $1.58, above the $1.39 FactSet estimate, as revenues rose 8.3% year-over-year (y/y) to $24.7 billion, topping the projected $23.9 billion. Shares relinquished early gains and finished lower.

Citigroup Inc. (C $49) posted 3Q profits of $1.24 per share, above the expected $1.15, as revenues declined 4.0% y/y to $17.8 billion, north of the projected $17.3 billion. C traded modestly higher after paring gains along with the broader financial sector.

Wells Fargo & Co. (WFC $45) announced 3Q EPS of $1.03, topping the estimated $1.01, with revenues rising 2.0% y/y to $22.3 billion, exceeding the forecasted $22.2 billion. WFC gave up early gains and closed lower.

Today's reports begin a heavy dose of banking sector results in the coming days as earnings season ramps up and Schwab's Director of Market and Sector Analysis, Brad Sorensen, CFA, offers in-depth analysis of the financial sector, including rationale for our outperform rating on the group in his latest Schwab Sector Views: Election Special at www.schwab.com/marketinsight.

HP Inc. (HPQ $14) issued fiscal 2017 EPS guidance with a midpoint that was roughly in line with the Street's forecasts, but its free cash flow forecast disappointed some analysts. Additionally, the company said it plans to cut 3,000 to 4,000 jobs over the next three years and increased its planned quarterly dividend by 7.0% to $0.1327 per share, while authorizing an additional $3.0 billion in share repurchases. Shares were under pressure.

Retail sales post solid gains, though consumer sentiment surprisingly sinks

Advance retail sales (chart) for September were up 0.6% month-over-month (m/m), matching the Bloomberg forecast, and compared to August's favorably revised 0.2% decline. Also, last month's sales ex-autos were higher by 0.5% m/m, in line with expectations, and following the negatively revised 0.2% decline seen in the previous month. Sales ex-autos and gas rose 0.3% m/m, in line with estimates, and versus August's upbeat revision to a flat reading. However, the retail sales control group, a figure used to help calculate GDP, was up 0.1%, compared to the projected 0.4% rise, and compared to the prior month's unrevised 0.1% dip. 10 of the 13 categories showed increases, led by solid gains in gasoline station, autos, building materials, and furniture sales, while health and personal care, as well as electronics and appliance sales slumped.

Retail sales rose by the most in three months, but the control group miss may be tempering some of the enthusiasm. Schwab's Chief Investment Strategist, Liz Ann Sonders notes in her article, Your Time is Gonna Come: Households' Leverage Down, Government Leverage Up, households have deleveraged significantly, and a key metric of debt servicing costs are hovering near a record low, which in the past has helped the economy perform admirably. However, Liz Ann adds that the rub for the economy this time is that households have become significantly more frugal as it relates to the balance between spending and saving. Read more at www.schwab.com/marketinsight and follow Liz Ann on Twitter: @lizannsonders.

The Producer Price Index (PPI) (chart) showed prices at the wholesale level in September were up 0.3% m/m, versus expectations of a 0.2% increase, and compared to August's unrevised flat reading. The core rate, which excludes food and energy, rose 0.2% m/m, above forecasts of a 0.1% increase and versus August's unadjusted 0.1% rise. Y/Y, the headline rate was 0.7% higher, versus projections of a 0.6% rise, and the core PPI gained 1.2% last month, matching estimates. In August, producer prices were flat and up 1.0% y/y for the headline and core rates, respectively.

In an afternoon speech at an economic conference sponsored by the Federal Reserve Bank of Boston, Fed Chair Janet Yellen addressed questions about how extreme economic events have often challenged views and the collective knowledge of economists. In one of the Fed Chief's reflections, she expressed how prior to the Great Recession, most economists likely would have agreed that changes in aggregate demand would not "have an appreciable, persistent effect on aggregate supply." However, Yellen further discussed that if this is not always the case, "the next natural question is to ask whether it might be possible to reverse these adverse supply-side effects by temporarily running a "high-pressure economy,"—one with stronger-than-average economic growth and low unemployment—though she concluded with the notion that additional research is necessary to further understand these complex relationships.

The preliminary University of Michigan Consumer Sentiment Index (chart) this month unexpectedly dropped to 87.9—the lowest since September 2015—from the prior month's 91.2 level, and compared to the expected increase to 91.8. The current economic conditions portion of the report improved, though the outlook component fell to weigh on the index. The 1-year inflation outlook remained at 2.4%, while the 5-10 year inflation estimate declined to 2.4% from 2.6%.

Business inventories (chart) rose 0.2% m/m in August, above forecasts of a 0.1% rise, and versus July's unrevised flat reading.

Treasuries finished lower, with the yield on the 2-year note flat at 0.84%, while the yield on the 10-year note increased 6 basis points (bps) to 1.80% and the 30-year bond rate rose 8 bps to 2.58%. Bond yields resumed a recent rally that has been bolstered by some upbeat economic data, hawkish Fedspeak, and the rise in crude oil prices. Schwab's Chief Fixed Income Strategist, Kathy Jones discusses the interest rate environment in her latest article, Are Bond Yields About to Rise?, at www.schwab.com/onbonds and follow Kathy on Twitter: @kathyjones.

Europe and Asia mostly higher on eased banking and China concerns

Stocks in Europe moved higher, with financials leading the way on eased Italian banking concerns and following the plethora of upbeat earnings results out of the U.S. Also, oil & gas and basic materials issues gained ground on the heels of some favorable Chinese inflation reports, which helped calm yesterday's flare-up in growth concerns that stemmed from softer-than-expected China trade data. December rate hike expectations in the U.S. were preserved by today's upbeat retail sales and slightly stronger-than-expected wholesale price inflation reports. In economic news in the region the eurozone trade surplus for August came in well above forecasts. The euro and British pound lost ground on the U.S. dollar, while bond yields in the region moved mostly higher.

With the swings in global growth sentiment and accompanying volatility in the markets, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, reminds investors, Three Reasons Why Now is Not the Time to Retreat from Global Diversification and why Your portfolio may be less diversified than you think. Read these articles, at www.schwab.com/oninternational, and follow Jeff on Twitter: @jeffreykleintop.

Stocks in Asia finished higher, as global growth concerns that resurfaced yesterday on disappointing Chinese trade data eased somewhat after China followed the trade report with hotter-than-expected September inflation figures, headlined by the first rise in wholesale price inflation since 2012. Securities trading in mainland China and Hong Kong ticked higher and the world's second largest economy is expected to deliver key lending statistics for last month in the coming days. For more on China, see Schwab's Director of International Research Michelle Gibley's, CFA, article, 5 Reasons China Won't Crash the Global Economy in 2016, while Schwab's Jeffrey Kleintop, CFA, offers timely analysis of the global economic picture in his article, World Tour: An Around The World Look At the Economic Landscape. Read both articles at www.schwab.com/oninternational, and follow Schwab on Twitter: @schwabresearch.

An advance for Japanese equities developed with the yen giving back some of the previous session's gains, while South Korean listings also gained ground. Australian stocks finished mostly flat as the China data boosted the Australian dollar, while technology and basic materials issues saw some pressure. Finally, Indian equities managed slight gains.

Stocks dip as conviction gets drained by a plethora of headwinds

U.S. stocks finished lower on the week despite upbeat bank earnings and economic data on Friday. Conviction was stymied by increased Fed rate hike expectations as data continued to perk up, U.S. Presidential uncertainty in the wake of the second debate, dampened earnings sentiment after Alcoa Inc's (AA $26) disappointing report, and resurfaced global growth concerns as China's trade data came in soft. The U.S. dollar continued to rally, along with bond yields, while crude oil prices were little changed in volatile action on festering supply uncertainty. Healthcare stocks led to the downside, while materials, energy and financials issues also saw some pressure.

Earnings season will ramp up next week, while the domestic economic calendar will yields a plethora of data to digest as the markets grapple with Fed rate hike expectations. The docket will be headlined by reads on industrial production and capacity utilization, the Consumer Price Index, housing starts and building permits, existing home sales, the Leading Index, regional manufacturing reports, and the Fed's Beige Book. Also, the Presidential election will remain a source of focus for the markets following Wednesday's final debate. As part of our election 2016 commentary, Schwab's Vice President, Legislative and Regulatory Affairs, Michael T. Townsend offers his latest article, Where Do the Candidates Stand? Key Issues for Investors, at www.schwab.com/insights/category/election-2016, where you can also find timely analysis of The Stock Market and Election Cycles.

As noted in the recent Schwab Market Perspective: Spinning Our Wheels, U.S. equity indexes are within the summer’s range and we believe a bullish rotation within equities may be taking place. The important third quarter earnings season is just gearing up, with expectations having been downgraded over the past couple of months, setting up the likelihood of a good quarter relative to expectations. However, some improvement in economic data and higher inflation readings leaves the possibility of tighter monetary policy from the Fed and even other central banks. Read more at www.schwab.com/marketinsight.

International reports due out next week include: Australia—employment change. China—lending figures, industrial production, retail sales, 3Q GDP, and property prices. India—trade balance. Japan—industrial production. Eurozone—European Central Bank monetary policy decision and the Consumer Price Index. U.K.—the Consumer Price Index and unemployment report.