Strong Earnings Help Boost Market As GDP Comes in Above Forecast

This morning, after gross domestic product data came in ahead of forecasts, the market is remaining upbeat as the number may not be so good as to drastically change expectations of a Fed rate cut next week. That left market participants to focus on strong earnings from big names.

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Key Takeaways

  • Alphabet beats top, bottom line expectations and announces buyback

  • Amazon’s earnings, guidance disappoint

  • Intel issues strong 3Q and full-year guidance

(Friday Market Open) With the market intently focused on what the Fed might do in its policy setting meeting next week, stronger-than-expected economic data has tended to weigh on sentiment because of its potential to keep central bankers more on the dovish side.

But this morning, after gross domestic product data came in ahead of forecasts, the market is remaining upbeat as the number may not be so good as to drastically change expectations of a Fed rate cut next week. That left market participants to focus on strong earnings from big names.

The government this morning in its first estimate of Q2 gross domestic product said the economy expanded at a yearly rate of 2.1%. Even though that was substantially lower than the 3.1% in Q1, the headline figure still beat a Breifing.com consensus expectation that had forecast advance GDP would come in at an annualized rate of 1.8%.

Futures market expectations were relatively similar before and after the data release, with a cut of some magnitude fully priced in. More than 80% of participants were expecting a cut of 25 basis points, and less than 20% were expecting a cut of 50 basis points. 

The GDP figure represents a key data point before the Fed is scheduled to begin its two-day policy meeting on Tuesday. There aren’t any major U.S. economic reports scheduled for Monday, while investors are scheduled to see personal consumption expenditures price index data, a home price index, consumer confidence numbers, and pending home sales data on Tuesday morning. 

Help From Positive Earnings

Strong earnings from some big names seem to have boosted market sentiment this morning.

Google parent Alphabet’s (GOOGL) shares were up more than 8% in pre-market trading after the company reported earnings and revenue that beat analyst expectations. The earnings beat was especially impressive. Paid clicks on Google properties rose 28% on a yearly basis while the cost per click on those properties dropped 11%. Alphabet also announced a $25 billion share repurchase program. 

Meanwhile, Intel’s (INTC) shares gained more than 5% after the chipmaker beat expectations on its top and bottom lines and issued above-consensus guidance for earnings and revenue for both 3Q and the full year.  

Twitter (TWTR) was also up more than 6% after the company reported revenue and earnings that beat expectations and said that it had an average of 139 million monetizable daily active users during the quarter, which was also more than analysts had forecast. 

On the other hand, Amazon’s (AMZN) shares were more than 1% lower after the online retailing giant reported lower-than-forecast earnings per share, issued disappointing profit guidance, and reported weaker-than-expected growth in its Amazon Web Services business. 

Fed Remains Key Focus

The major U.S. indices took a tumble Thursday amid expectations that the Fed won’t be as aggressive as hoped. 

With the market so focused on what the Fed might or might not do at its meeting, strong economic data seemed to be viewed in the light of how it might affect the Fed’s decision rather than being taken as the boon it is for the broader economy. (See more on durable goods orders below.)

Ford’s (F) shares fell more than 7.4% after the automaker missed Wall Street earnings estimates and issued disappointing guidance. Meanwhile, Xilinx (XLNX) dropped more than 3.4% despite beating earnings estimates as the chipmaker also issued disappointing guidance.  

Still the S&P 500 Index (SPX) managed to close above the 3000 level. And although Wall Street’s main fear gauge, the Cboe Volatility Index (VIX) rose more than 5.5%, it was still well below the spike above 20 we saw in May. The optimism appears to be backed by expectations of a Fed rate cut, which have sent stocks to record highs recently. 

FIGURE 1: VIX BOUNCE. After falling below 12, the Cboe Volatility Index (VIX) rose back above that level on Thursday. However, the key fear indicator is off substantially from levels seen in May. Investors seem generally optimistic about a Fed rate cut later this month. Data Source: Cboe Global Markets. Chart source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only. Past performance does not guarantee future results.  

Double-Edged Sword: Durable goods orders for June knocked the cover off the ball. The measure of orders for long-lasting manufactured goods jumped by 2% last month, double the Briefing.com consensus expectation of 1%. On its face, the fact that spending on durable goods was up is a good sign for the economy, but it ended up weighing on the market. As another sign that the economy is doing OK, it seems to be another clue for market participants that the Fed probably won’t issue a 50-basis-point rate cut. Rather, it may stick with a more-conservative cut of 25-basis-points. Overall, it seems that the market thinks the Fed has more legroom to lower rates than it may end up taking. 

Fed Not Only Game In Town: The durable goods data came after news that the European Central Bank left interest rates unchanged. Even though the central bank hinted strongly that a rate cut could happen later in the year, the ECB president said economic policy makers see the risk of recession as low. The relatively upbeat comments about the euro-zone economy seemed to further dent expectations of a more-aggressive interest rate cut by the Fed. After all, slowing global growth is one of the reasons behind the Fed’s expected cut, but the urgency for that wanes if Europe’s economy ends up doing better than expected. Still, there’s a huge wild card out there when it comes to the global economy: namely, the U.S.-China trade dispute. As long as that card is still on the table, investors may want to be cautiously optimistic at best. 

GDP, Then Jobs: While this week is capped with big economic data in the form of the GDP figures, the last trading day of next week is scheduled to get what most see as the most important report of the month. The government is set to release its jobs report for July. If you’ll recall, June jobs data came in at 224,000, well above the Briefing.com consensus expectation for 160,000 jobs to be created. That number was a hefty boost from the downwardly revised 72,000 jobs added the previous month. If we get another month of bumper jobs data, it could provide another counterpoint to the worries about economic growth even as the U.S.-China trade war may still be dragging on. 

Good Trading,

JJ 

@TDAJJKinahan 

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Economic calendar for week of July 22. Source: Briefing.com

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Key Takeaways

  • Alphabet beats top, bottom line expectations and announces buyback

  • Amazon’s earnings, guidance disappoint

  • Intel issues strong 3Q and full-year guidance

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