After The Close
Stocks made selective progress today as earnings season shifted into high gear. At the close of trading, the Dow Jones Industrial Average was up 79 points and the S&P 500 rose six points. The NASDAQ lagged, though, in a flat showing after closing at an all-time high yesterday. The broader market showed about an eight-to-seven margin of winners over losers.
Overall, the tone of earnings and the economy seems to be outweighing reservations over escalating international tensions regarding trade and tariffs.
Federal Reserve Chairman Jerome Powell testified before Congress for the second consecutive day on Wednesday. Mr. Powell indicated that economic conditions are strong, unemployment remains low, and the Fed is on track to gradually raise interest rates. He did note, however, that there is a chorus of concerns from businesses about the spread of tariffs. The 2:00 p.m. EDT release of the Fed’s Beige Book also noted companies were having some difficulty finding workers with the tight labor market.
Meanwhile, corporate profits are coming in stronger than expected, for the most part. Several companies reporting results both topped analysts’ estimates and raised their guidance, including business supplies provider Grainger (GWW), airliner UAL (UAL), and railroader CSX (CSX). Quarterly earnings per share growth of 25% is not uncommon these days. Importantly, companies are attributing growth to strength in the economy to a greater extent, rather than tax cuts, and revenue expansion is more of a factor than cost reductions.
In economic news, there was a weak report out on June housing starts and building permits. The data was expected to have held about steady from May, but fell instead. The downcast view is that higher mortgage rates and rising costs for labor and materials are starting to pinch in a market where home prices are rising. But it may take another month of data to establish whether or not a clear trend is in place.
Lastly, in the oil market, there was an unexpected weekly 5.8 million barrel build in supplies, as reported by the Energy Department. Investors had been looking for a 3.5 million barrel draw. Oil prices nevertheless rose about $0.65 a barrel, to around $68.75 in New York trading. Oil quotations had been weak for a few days on concerns that supplies might rise, but apparently most of the selling had already taken place.
- Robert Mitkowski
At the time of this writing, the author did not have positions in any of the companies mentioned.
Before The Bell
Earnings are again taking center stage on Wall Street, as quarterly results are flooding in and, for the most part, making for very good reading. To be sure, there are some outliers. On that point, Netflix (NFLX) reported weaker-than-expected subscriber growth in the last quarter, and initially saw its shares tumble almost 10% on that news, forcing a bearish start that was offset quickly by good news out of health care mainstay and Dow Jones Industrial Average component Johnson & Johnson (JNJ – Free Johnson & Johnson Stock Report). That company posted excellent results and saw its shares climb nicely.
Overall, the market, following a weak start, came back nicely as we neared the conclusion of the morning in New York, to finish the first half of the session in the black, with the Dow, the S&P 500 Index, and even the NASDAQ, where the aforementioned Netflix is domiciled, climbing into the plus column. The smaller-cap indexes did even better. Meantime, other tech-related stocks followed the Netflix lead in heading lower at the start. But they came back quickly, as did Netflix, which halved its early loss as noon arrived on the East Coast.
So, as the afternoon got under way, the stock market was headed modestly higher. That strength was not surprising, as earnings season is off to a good start. Of course, with expectations already high, these profit forecasts will need to be met, and perhaps exceeded, to keep the bulls forging ahead. Meantime, in other news, there were continuing worries about global trade, as opposition to the President's aggressive tariff policy was evolving in Congress. Also, Federal Reserve Chair Jerome Powell said further interest rate hikes are likely, given the considerably stronger economy now in place, but also saw just modest inflation ahead.
As to the economy, a key release was forthcoming at 9:15 (EDT) yesterday morning, as the Commerce Department issued figures on industrial production and factory usage for June. Here, we saw that industrial output rose by 0.6% last month, following a 0.5% dip in May. Also, capacity utilization gained, as well, climbing from May's 77.7% to 78.0% last month. As for production, the latest figures showed another increase, making for an uptick in such activity during four of the first six months of this year. This solid performance was another indication that GDP growth likely surpassed 4% in the second quarter.
The advance then quickened after lunch, and as we moved inside the final two hours of trading, the Dow was up some 70 points; the S&P 500 was better by 12 points; and the NASDAQ had gained more than 50 points. Solid gains also had been secured by the small and mid-cap indexes. As for the respective sectors, all of the top 10 groups were higher, save for telecom, with basic materials in the lead. Meanwhile, advancing stocks led declining issues on the Big Board by a five-to-three count at that hour. The market seemed poised for a strong finish.
The advance then would continue into the close even gathering momentum for a time as the session wound down, finally ending with solid, but not memorable gains. At the finish line, the Dow was ahead by 55 points, remaining the weakest performer through much of the day, with UnitedHealth Group (UNH – Free UnitedHealth Group Stock Report), a drag on that composite, and a key reason for the Dow's underperformance. The S&P 500 added 11 points; and the NASDAQ added 49 points. Gainers continued to lead declining issues on the Big Board by a nice margin, meantime.
Looking out at a new day now, we see that the major indexes were mixed in Asia overnight, while in Europe, the key bourses are now tracking higher on earnings. Also, oil prices are off a bit as U.S. crude stocks build so far this morning, while yields on the 10-year Treasury note, which held steady at 2.86% yesterday, are unchanged for now. The yield, meantime, is just modestly below the 30-year bond, suggesting a further flattening in the yield curve, which can be a sign of a softening economy. However, there are no signs of economic headwinds up ahead at this time. Finally, our futures are indicating a slightly negative opening when equity trading resumes.
– Harvey S. Katz, CFA
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
