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Earnings Extravaganza Rolls On, With Strong Results Bolstering Market

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July 22, 2016

(Friday Market Open) After weeks of jubilation, stocks appear ready to extend their rally Friday as positive news from the earnings front keeps rolling in. The strength in stocks comes in spite of a sluggish oil market.

So far this earnings season, the message has been mostly positive from reporting companies, helping give the overall market continued momentum. These strong earnings weren’t expected by any stretch of the imagination, and potentially give the market a chance to run further.

The big earnings report this morning came from General Electric (GE), a company that bears watching simply because it sells so many different products in so many different markets. It’s kind of a canary in the coalmine for the world economy.

So is the canary singing a happy tune this morning? Based on the raw numbers alone, the answer would appear to be yes. GE posted adjusted earnings of 51 cents a share in the second quarter, topping analysts' forecasts of 46 cents. Revenue rose 15% to $33.5 billion. Analysts expected revenue of $31.9 billion. 

GE futures fell in the pre-market, as investors seemed to focus on the company reporting that industrial orders fell quarter-over-quarter. This data point may keep the stock from rallying sharply, but the overall message from GE’s earnings is a good one.

Just because of what a giant conglomerate it is, GE tends to be a gorilla overshadowing all other companies that report the same day. But there were quite a few. Honeywell (HON) earned $1.66 a share in the second quarter, beating forecasts by 2 cents. The company said it was raising the low-end of its full-year earnings guidance range to $6.60 to $6.70 a share. And American Airlines (AAL) also beat expectations with earnings of $1.77 a share.

On the less positive side of the earnings equation, Starbucks (SBUX), which reported after Thursday’s close, missed revenue expectations by $100 million. Same-store sales rose 4%, down from 7% the preceding quarter.

Crude oil continues to struggle, and is on pace to close the week lower, thanks in part to bulging U.S. gasoline supplies and rising output from key producers like Iraq. U.S. crude futures were trading below $45 early Friday. Falling oil prices represent something of a headwind for the stock market, with the corellation between stocks and oil now in the 70% range. That’s down from more than 90% earlier this year, but up from below 70% more recently.

Part of the weakness in oil may reflect strength in the U.S. dollar, which was up against both the euro and yen Friday morning.

Data-wise, it’s a rather light day, but manufacturing PMI is out this morning.

Data released Thursday continued to paint a positive picture, with existing home sales for June rising 1.1% from May to an annualized rate of 5.57 million units, above expectations for 5.5 million. Sales of existing homes have been on a tear lately, and the National Association of Realtors said June sales were sparked by increased purchases from first-time buyers. On an annual basis, existing home sales are at their highest level in almost 10 years.

In other data reported Thursday, the CB Leading Indicators report for June increased 0.3%, in line with expectations.

From a technical perspective, the S&P 500 Index (SPX) closed just below the important level of 2166 on Thursday. That area may be worth watching today to see if the index can move above it.

S&P 500

FIGURE 1: SMOOTHER SAILING?

The S&P 500 (SPX), plotted through Thursday on the TD Ameritrade thinkorswim platform,  seems to be leveling out a little after the month’s spirited start, which in turn followed the Brexit bust in late June. Treasury bonds remain resilient, possibly a sign that there’s still a hunger for safety. Data source: Standard & Poor’s. For illustrative purposes only. Past performance does not guarantee future results.

Are Earnings Up? It Depends On How You Look At It: Amid all the earnings beats from big companies, it’s easy to forget that Q2 earnings on the whole are still widely expected to fall year over year. S&P Global Market Intelligence now projects companies in the S&P 500 index (SPX) to record a 4.4% drop in Q2 earnings. Only four of 10 S&P sectors are projected to have positive earnings growth for Q2, led by consumer discretionary, health care, industrials, and utilities. That said, the energy sector is a major drag that pulls down all the other sectors, with earnings in energy expected to fall 81% year over year. Subtract energy from the equation and overall Q2 earnings growth would be 0.4%.

Healthy Crops; Healthy Stocks: A number of stocks in the agriculture sector, including Archer Daniels Midland (ADM), Caterpillar (CAT), and Bunge (BG) were up Thursday, and that could be partly due to blossoming prospects for a bountiful U.S. fall harvest. The old farm saying is “knee high by the 4th of July” for corn, and that seems to be the case this year. Crop scouts touring Midwest corn and soybean fields are reporting excellent conditions despite the recent heat, Bloomberg reported Thursday. When harvests are healthy, it can inject more money into the farm sector, allowing bigger purchases of equipment and seed. The down side, however, is that crop prices tend to come under pressure when supplies grow, which could put a dent in farmers’ wallets. Corn and soybean prices wilted earlier this month when the U.S. Department of Agriculture forecast hefty production for both crops.

Safety Over Yield: Though stocks keep posting new record highs, it seems like a lot of money remains in safer investments, as bonds haven’t given back too much of their recent gains. Yields on the German Bund fell back into negative territory late this week. And the yield on the benchmark U.S. 10-year bond, which rose above 1.6% earlier this week, gave back some gains and remained below that level early Friday. The continued low yields could mean many people aren’t fully invested in the stock market and there’s still more hunger for safety.

Good Trading,
JJ
@TDAJJKinahan

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JJ Kinahan

JJ began his career in 1985 as a Chicago Board Options Exchange...

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