U.S. stocks are trading higher as the Street is reacting positively to softer-than-expected earnings results from some key companies. As Q2 earnings season heats up, Dow members Microsoft and Boeing, along with Google parent Alphabet are gaining ground even as their results came in below estimates. However, Texas Instruments, Chipotle Mexican Grill, and Dow component Visa all reported quarterly results that exceeded estimates. Meanwhile, the markets are rising even as the Fed is expected to raise its benchmark interest rate by 75 basis points for the second-straight meeting this afternoon. The economic calendar had some positive data points, with preliminary durable goods orders rising more than expected, the advance goods trade deficit narrowing more than projected, and wholesale inventories topping forecasts. However, mortgage applications fell for a fourth-straight week, and pending home sales fell by the largest amount since the start of the pandemic. Treasuries are subdued ahead of the Fed's decision and the U.S. dollar is ticking higher. Crude oil is trading higher and gold prices are trading to the downside. Asia finished mixed and Europe was mostly higher despite some lackluster earnings results.
At 12:46 pm ET, the Dow Jones Industrial Average is up 0.4%, the S&P 500 Index is rising 1.4%, and the Nasdaq Composite is gaining 2.5%. WTI crude oil is advancing $2.35 to $97.33 per barrel, and Brent crude oil is increasing $1.69 at $101.15 per barrel. The gold spot price is decreasing $0.10 to $1,717.60 per ounce, and the Dollar Index is ticking 0.2% higher to 107.39.
Dow member Microsoft Corporation (MSFT $264) reported fiscal Q4 earnings-per-share (EPS) of $2.23, below the $2.29 FactSet estimate, with revenues rising 12.0% year-over-year (y/y) to $51.9 billion, south of the Street's forecast of $52.4 billion. The company said in a dynamic environment it saw strong demand, took market share, and increased customer commitment to its cloud platform. However, an unfavorable foreign exchange rate movement, extended production shutdowns in China, reductions in advertising spend, the ongoing war in Ukraine, and employee expenses weighed on its results. Shares continue to rise as the company's guidance seems to be better than feared.
Alphabet Inc. (GOOGL $112), the parent of Google, posted Q2 EPS of $1.21, below the expected $1.27, as revenues grew 13.0% y/y to $69.7 billion, missing the $69.8 billion estimate. Traffic acquisition costs (TAC) came in below forecasts, and it said search and cloud revenues drove its Q2 results, but its YouTube ad revenue was below projections. GOOGL is trading higher as the Street seems to be cheering its search results.
Dow component Boeing Company (BA $156) reported an adjusted Q2 loss of $0.37 per share, larger than the $0.13 per share shortfall that was expected, with revenues declining 2.0% y/y to $16.7 billion, south of the forecasted $17.6 billion. The company said its results were driven by lower defense volume and unfavorable performance, partially offset by higher commercial volume. BA said, "We made important progress across key programs in Q2 and are building momentum in our turnaround...As we begin to hit key milestones, we were able to generate positive operating cash flow this quarter and remain on track to achieve positive free cash flow for 2022. While we are making meaningful progress, we have more work ahead." BA is trading slightly lower.
Texas Instruments Incorporated (TXN $169) announced Q2 earnings of $2.45 per share, above the expected $2.13, as revenues rose 14.0% y/y to $5.2 billion, north of the forecasted $4.7 billion. The company said it saw growth across markets and its cash flow from operations underscored the strength of its business model. TXN issued Q3 guidance that was above expectations. TXN is trading higher.
Dow member Visa Inc. (V $214) reported Q3 adjusted EPS of $1.98, above the $1.75 per share FactSet estimate, as net revenues increased 19.0% y/y to $7.2 billion, beating estimates of $7.1 billion. Despite the macroeconomic uncertainty alongside significant exchange rate headwinds and business suspension in Russia noted by the company, Visa said, "Sustained levels of growth in overall payments volume, cross-border volume and processed transactions demonstrated the resiliency of our business model." The company added that consumers are back on the road, visiting various corners of the world, resulting in cross-border travel volume surpassing 2019 levels for the first time since the pandemic began in early 2020. Visa issued guidance for Q4 net revenues to grow at the high teens to 20% range. Shares of Visa are higher.
Chipotle Mexican Grill Inc. (CMG $1,506) announced adjusted Q2 EPS of $9.30 that beat the Factset estimate of $9.03 per share, although revenues only grew 17% y/y to $2.2 billion, as opposed to the forecasted $2.3 billion. The company noted its pricing power–the ability to adjust prices–helped offset the increase in food, beverage and packaging costs caused by inflation. Additionally, Chipotle saw an increase in purchase frequency from its main customers, who are higher household income consumers, while the frequency from lower income households slowed down. The company also reaffirmed its outlook for Q3, stating that it expects comparable restaurant sales growth, and planned price rate increases in August, to come in around the mid to high-single digits. Shares are increasing by a significant amount.
Q2 earnings season has shifted into high gear this week, and of the 180 S&P 500 companies that have reported thus far, roughly 60% have topped revenue forecasts and approximately 73% have bested profit projections, per data compiled by Bloomberg. Compared to last year, revenue growth is tracking to be up 7.8% though earnings are down 2.4% thus far.
Schwab's Chief Investment Strategist, Liz Ann Sonders discusses the economy in her latest article, The Thrill Is Gone: Earnings Season Kicks Off, how Q2 earnings growth will mark an expected deceleration in profits, but focus will likely continue to shift to the pace at which outlooks are downgraded.
Durable goods orders rise, mortgage applications decline, key Fed decision looms
Preliminary durable goods orders (chart) rose 1.9% month-over-month (m/m) during June, compared to the Bloomberg consensus estimate of a 0.4% decrease and versus May's unrevised 0.8% increase. Ex-transportation, orders were up 0.3% m/m, topping forecasts calling for a 0.2% advance and compared to May's downwardly-adjusted 0.5% rise. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, were higher by 0.5%, compared to projections of a 0.2% rise, and versus the prior month's negatively-adjusted 0.5% gain.
The MBA Mortgage Application Index decreased 1.8% last week, following the prior week's decline of 6.3%. The index was down for a fourth-straight week as a 3.7% drop in the Refinance Index was met with a 0.8% dip for the Purchase Index. The decline came even as the average 30-year mortgage rate decreased 8 basis points (bps) to 5.74%, but is up 273 bps versus a year ago.
In other housing news, pending home sales fell much more than expected, dropping by 8.6% m/m in June, versus estimates of a 1.0% decline and following May's negatively-revised 0.4% decrease. Sales tumbled 19.8% y/y on the heels of May's negatively-adjusted 12.3% fall. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales, and posted the largest m/m decrease since April 2020 as housing affordability drops.
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.
The advance goods trade balance showed that the June deficit narrowed much more than expected to $98.2 billion, versus estimates calling for it to contract to $103.0 billion from May's downwardly-revised shortfall of $104.0 billion.
Preliminary wholesale inventories grew 1.9% m/m for June, compared to expectations of a 1.5% gain, and versus May's favorably-revised 1.9% increase.
A busy week will hit its stride today, headlined by the 2:00 pm ET Federal Open Market Committee's (FOMC) monetary policy decision. The FOMC is expected to raise its target for the fed funds rate by 75 bps for a second-straight meeting. The decision will not have updated economic projections but will offer the customary press conference from Fed Chairman Jerome Powell, which will likely be highly scrutinized as the markets try to determine how aggressive the Central Bank will remain at its next meeting in September.
Treasuries are mixed ahead of the Fed's decision, and the inversion of the 2-year and 10-year notes remains intact with the markets grappling with how aggressive the Fed will be to fight high inflation and what ultimate impact on the economy could ensue.
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.
The yield on the 2-year Treasury note is up 4 bps to 3.09%, while the yield on the 10-year note is down 2 bps to 2.77%, and the 30-year bond rate is dipping 1 bp to 3.00%.
Europe closed mostly higher as markets awaited Fed decision and digested earnings results
European equities finished mostly in the green as the global markets awaited today's Fed monetary policy decision out of the U.S., while also sifting through a host of earnings results on both sides of the pond. The Fed is largely expected to raise rates by 75 bps for a second-straight meeting, and the markets gained ground despite a drop in shares of Adidas AG (ADDYY $82) after it cut its outlook, and Credit Suisse Group AG (CS $5) rose even as the company reported softer-than-expected trading results. In economic news, consumer sentiment readings out of Germany, France and Italy all deteriorated. The euro decreased slightly and the British pound finished little changed versus the U.S. dollar ahead of the Fed's decisions, and bond yields in the Eurozone and the U.K. moved mostly to the upside.
Inflation is the main driver of tighter monetary policies and dampened consumer and business sentiment, but Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his 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.
The U.K. FTSE 100 Index was up 0.6%, France's CAC-40 Index rose 0.8%, Germany's DAX Index advanced 0.5%, Italy's FTSE MIB Index gained 1.5%, and Spain's IBEX 35 Index increased 0.7%, while Switzerland's Swiss Market Index declined 0.4%.
Asia mixed ahead of Fed decision
Stocks in Asia finished mixed as the markets traded cautiously ahead of today's monetary policy decision out of the U.S., while tech and property-related issues remained choppy amid continued uncertainty regarding regulations and potential bailouts from China. The disruption of COVID-induced lockdowns in the world's second-largest economy of China also continues to hamper the global outlook and Schwab's Jeffrey Kleintop notes in his article, China's Yo-Yo Economy, that although an economic rebound in China is underway according to government and private sector data, its economy and stock market may remain volatile. In economic news, Japan's leading indicators for May were revised lower, South Korean consumer confidence fell in July, China's industrial profits rebounded y/y in June, and headline Q2 consumer price inflation out of Australia came in cooler than expected.
Japan's Nikkei 225 Index rose 0.2%, with the yen softening slightly. The yen has dropped to multi-decade lows since March as the Fed has gotten aggressive with its monetary policy while the Bank of Japan has abstained from tightening its policy. China's Shanghai Composite Index dipped 0.1%, and the Hong Kong Hang Seng Index fell 1.1%. Australia's S&P/ASX 200 Index was up 0.2%, South Korea's Kospi Index ticked 0.1% higher, and India's S&P BSE Sensex 30 Index moved 1.0% to the upside.
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