Stocks Solidly Higher in Afternoon Trading
U.S. equities are seeing solid gains, as the bulls look to sustain the rise today after failing to do so yesterday. Investors remain on edge, however, as persistent inflation has caused global central banks to move toward tighter monetary policies, sparking concerns of a possible recession. Earnings season continues to ramp up as Dow member IBM beat on both the top and bottom line, but foreign exchange affects and soft revenue in its software are causing the stock to fall. Fellow Dow component Johnson & Johnson also beat estimates, but a downward adjustment to its guidance is pressuring shares, while Lockheed Martin is dipping after posting earnings that were incomparable to estimates due to issues with contract timing. The economic calendar reaffirmed recent softening in the housing market as housing starts unexpectedly fell, extending a recent decline, while building permits also dipped but less than expected. Treasuries are lower as yields are moving higher, and the yield curve remains inverted. The U.S. dollar is falling, continuing to come back off 20-year highs, crude oil has turned higher, and gold nudging to the upside. Europe saw broad gains as investors anticipate the European Central Bank to hike rates this week for the first time in 11 years, and Asia finished mostly lower with Japan the outlier in the green.
At 12:50 p.m. ET, the Dow Jones Industrial Average is advancing 2.0%, the S&P 500 Index is gaining 2.2%, and the Nasdaq Composite is rallying 2.5%. WTI crude oil is up $1.18 to $100.60 per barrel, and Brent crude oil is rising $0.80 at $107.07 per barrel. The gold spot price is increasing $1.30 to $1,711.50 per ounce, and the Dollar Index is falling 0.8% to 106.56.
Dow member International Business Machines Corporation (IBM $129) reported Q2 earnings-per-share (EPS) of $2.31, above the $2.26 FactSet estimate, as revenues rose 9.3% year-over-year (y/y) to $15.5 billion, topping the Street's forecast of $15.1 billion. The company's software revenue, the largest of its four key segments, rose y/y but was below expectations. IBM CFO, James Kavanaugh, said, "We are a faster-growing, focused, disciplined company with sound business fundamentals. Our recurring revenue stream and solid cash generation position us well to continue to invest in research and development, acquire new companies, and strengthen our talent in every part of the business, while also returning value to shareholders through our dividend." The company warned of a potential 6% foreign exchange hit due to a strong dollar, which was previously forecasted as a 3%-4% hit. Shares are falling.
Dow member Johnson & Johnson (JNJ $173) reported Q2 EPS of $2.59, above the forecasted $2.54, as revenues rose 3.0% y/y to $24.0 billion, just north of the Street's forecast of $23.8 billion. Johnson & Johnson saw adjusted operational sales growth of 8.1% which included rises in each of its key segments of consumer health, pharmaceuticals, and medical devices. CEO Joaquin Duato said, "Our solid second quarter results across Johnson & Johnson reflect the strength and resilience of our company's market leadership in the midst of macroeconomic challenges." JNJ lowered its full-year EPS guidance due to foreign exchange effects. Shares are modestly lower.
Lockheed Martin Corporation (LMT $385) reported Q2 EPS of $6.32, however, it was unclear if it was comparable to the $1.88 FactSet estimate due to the inclusion of non-operational charges. Revenues fell 9.3% y/y to $15.5 billion, south of the FactSet estimate of $16.0 billion. Additionally, CEO, James Taiclet, said, "Lockheed Martin continued to deliver strong and consistent cash generation, returning over $1 billion in cash to shareholders in the second quarter through our industry leading dividend and our ongoing share repurchase program." He also noted revenue was affected by supply chain impacts and the timing of customer contract negotiations, but cost management initiatives resulted in margin expansion. The aerospace and defense company provided an update on its F-35 contract with the U.S. government where it noted that company costs began to exceed the contract value and available funding in Q2. As a result, LMT was unable to recognize about $325 million of sales and operating profit as well as invoicing and receiving cash of roughly $465 million for costs incurred. The company said it expects to recover the unrecognized sales and resume invoicing costs once the contract is finalized which it expects in Q3. Shares are dipping.
Q2 earnings season continues to heat up and the markets are paying close attention to the health of profit margins and economic activity as the Fed gets aggressive with its monetary policy tightening amid a backdrop of signs of slowing economic growth.
Schwab's Chief Investment Strategist, Liz Ann Sonders discusses the economy in her latest article, What's Going On…With Jobs, how the June jobs report was cheered by economic bulls given its strength in level terms, but rates of change among leading indicators don't favor a soft-landing outcome for the economy. You can follow Liz Ann on Twitter: @LizAnnSonders.
Housing starts unexpectedly extend decline
Housing starts (chart) for June fell 2.0% month-over-month (m/m) to an annual pace of 1,559,000 units, below the Bloomberg consensus estimate of a rise to a 1,580,000 unit pace and compared to May's upwardly-revised pace of 1,591,000 units. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, dropped by 0.6% m/m to an annual rate of 1,685,000, north of expectations calling for 1,650,000 units, and compared to the unrevised 1,695,000 unit pace in May.
Schwab's Liz Ann Sonders discusses the housing market in her article, Can't Find My Way Home, how a spike in prices and interest rates has dealt a significant blow to housing affordability, elevating the potential for the housing market's weakness to dampen economic growth.
Treasuries are lower, and the inversion of the 2-year and 10-year notes remains intact, with the markets grappling with an aggressive Fed to fight high inflation and what the ultimate impact will be on the economy.
Schwab's Chief Fixed Income Strategist Kathy Jones discusses this in her latest article, Fed Rate Hikes: Why Are Bond Yields Falling?, noting that the Federal Reserve's pledge to curb inflation appears to have resonated with the market. She adds that if the central bank raises rates as much as recent projections indicate, the risk of recession rises. Kathy concludes that consequently, bond yields have been pulling back from recent highs and the yield curve has flattened. You can follow Kathy on Twitter: @KathyJones.
The yield on the 2-year Treasury note is rising 4 basis points (bps) to 3.21%, the 10-year Treasury note is up 5 bps to 3.01%, and the 30-year bond is gaining 3 bps to 3.17%.
Europe higher as it awaits monetary policy decisions
European equities finished with widespread gains in a relatively muted session to extend the past two session's gains. Markets keenly waited on the monetary policy decision from the European Central Bank where it's expected to raise rates for the first time in 11 years, as well as the policy meeting from the Bank of Japan. Globally tighter monetary policy conditions come as a result of persistent inflation pressures which have also caused some worries of a global recession. The economic calendar showed that U.K. jobless claims further decreased in June, and Switzerland's exports rose in June, while its imports dipped. Final reads on the Eurozone's CPI reaffirmed an 8.6% y/y and a 0.8% m/m rise. Both the euro and British pound were solidly higher versus the U.S. dollar, and bond yields in the U.K. and across Europe declined.
Inflation has been the main driver of tighter monetary policies and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Shortages Have Led to Gluts, noting how inventory gluts have been bad news for the stocks of companies experiencing them, but could also be indicating an inflation peak, which tends to be an ingredient for market bottoms. You can follow Jeff on Twitter: @JeffreyKleintop.
The U.K. FTSE 100 Index and Switzerland's Swiss Market Index were up 1.0%, France's CAC-40 Index was 1.7% higher, Germany's DAX Index jumped 2.7%, Italy's FTSE MIB Index gained 2.5%, and Spain's IBEX 35 Index rose 2.0%.
Asia mostly lower, Japan rises
Stocks in Asia were mostly lower following yesterday's rise as markets remained wary in a week full of earnings and data. Asian markets paid attention to Australia's central bank meeting minutes which suggested further rate increases will be needed to reel in inflation. Investors are looking forward to Thursday's monetary policy decisions from the Bank of Japan and the European Central Bank, the former of which is expected to keep rates steady, while the latter is expected to increase rates. Market sentiment continues to be hampered down by concerns of a possible recession as a result of tighter monetary policies globally as well as rising COVID cases that have caused further shutdowns in China. The economic calendar in the region was light but saw Hong Kong's unemployment rate decreased more than expected.
Amid the backdrop of lockdowns in China and the ensuing slowdown in economic growth, Schwab's Jeffrey Kleintop discusses in his article, Recession in China?, how China's economy and consumer market has likely slipped into a recession, at least by China's standards. Jeff takes a look at the short-term and long-term impacts of any extended disruption of the lockdowns on consumer spending and business output.
Japan's Nikkei 225 Index rose 0.7% in a return to action following Monday's holiday, with the yen rising versus the U.S. dollar. China's Shanghai Composite Index was nearly flat, the Hong Kong Hang Seng Index fell 0.9%, South Korea's Kospi Index decreased 0.2%, Australia's S&P/ASX 200 Index was down 0.6%, while India's S&P BSE Sensex 30 Index moved 0.5% to the upside.