(Friday Market Open) The earnings season, which got off to a rip-roaring start, stumbled slightly late this week as some key companies like Amazon (AMZN) and Exxon Mobil (XOM) fell short of Wall Street’s projections. On a more positive note, the government’s first reading of Q2 economic performance reached 2.6%, a solid jump from 1.4% in Q1.
Shares of Amazon (AMZN) have been powering up all year, but hit a wall in post-market action Thursday after the company reported a huge earnings miss compared with analysts’ expectations. Keep things in perspective, however. Revenue came in above Wall Street’s expectations with 25% growth, and cloud computing — a key segment — performed well, growing 42% year over year. That represented a slight slow-down in growth for that part of the business.
Looking at AMZN’s earnings from a high level, it’s definitely not a good thing to see the company fall so far below EPS expectations, but it probably would have been more worrisome had AMZN missed on its revenue number. AMZN’s decision to buy Whole Foods (WFM) is one sign that AMZN is spending money and investing in its business, and that kind of heavy investment strategy could certainly impact its bottom line. AMZN’s guidance for Q3 was in line with analyst expectations, so the underlying business appears to be healthy.
Starbucks (SBUX) also lost a little of its buzz in pre-market trading after missing analysts’ estimates on revenue and lowering guidance. On a sad note for tea drinkers, the company announced it’s closing all 379 of its Teavana locations over the coming year.
On the energy side, Exxon Mobil (XOM) turned lower after missing Wall Street’s bottom line estimates and beating on the top line. Some of the other key companies reporting include American Airlines (AAL), AbbVie (ABBV), and Merck (MRK).
It might be interesting to watch the health care sector today to see how it responds to the Senate’s dramatic early morning vote against the latest Republican-proposed health reform bill. Health care stocks came under pressure Thursday ahead of the vote. One possible outcome of the failed health care legislation could be Congress turning back to tax reform, something many on Wall Street had been hoping to see.
There’s also some key data hitting the wire this morning, as Q2 Gross Domestic Product (GDP) matched analysts’ estimates with a 2.6% reading. That first Q2 estimate from the government is up sharply from the 1.2% seen in Q1.
Thursday turned into a day of contrasts on Wall Street, with the Dow Jones Industrial Average ($DJI) cruising to a new record high even as the Nasdaq (COMP) sank and the S&P 500 (SPX) charged back from steep midday losses to close just a little lower. Transport, health care, and a lot of tech stocks got smacked around, but consumer discretionary performed well and telecom had another big day as AT&T (T) and Verizon (VZ) kept rallying on firm earnings. Disney (DIS) shares also went on a tear, and Boeing (BA) continued its ascent.
An old friend that had been beaten up lately finally broke out of its funk a little Thursday as the VIX climbed back from record lows, rising almost 11% at one point during the day. Some other defensive investments like gold also climbed, but strangely enough, bonds fell. Ten-year yields remain right in the middle of their recent trading range. As of early Friday, the dollar was falling against other key currencies.
With the Fed meeting over, Fed speakers re-enter the picture. Today brings a speech by Minneapolis Fed President Neel Kashkari, a well-known dove.
More Thoughts on the Fed: Basically, the Fed’s in a tough spot here for the rest of 2017 as it mulls the possibility of another rate hike, because inflation remains low, the balance sheet unwinding is likely to begin, and economic growth remains modest. On the other hand, the stock market continues to hit record highs and the job growth is relatively steady with unemployment well under 5%. The Fed isn’t necessarily “trapped,” but the phrase “between a rock and a hard place” might apply to its rate process moving forward. After nearly nine years of rock-bottom rates, it’s hard to say the Fed risks taking the punch bowl away too soon, but inflation and economic growth at the moment just aren’t giving it a lot of incentive to raise rates further. Also, U.S. rates remain well above rates in Europe and Japan.
Check-in With the Consumer: Earlier this week, the Conference Board delivered a firmer-than-expected consumer confidence reading for July, and today brings more sentiment data from the University of Michigan. The report, which will be the final number for July, is expected to ring in at 93.1, according to Briefing.com, unchanged from the preliminary headline reading released earlier this month. Michigan sentiment, while still pretty high compared with most of the last decade, has come down pretty steadily over the last few months, dropping from a peak of 97.1 in May. Another number to watch in the report, other than the headline, is the index of Consumer Expectations, which fell in the preliminary July report and is 10 points below its January peak. In some respects, the Consumer Expectations number might be the one to watch, as it potentially tells investors about future economic prospects.
Dialing Up Earnings Expectations: It’s been such a good start to earnings season that research firm CFRA is re-working its estimates. The firm now sees Q2 earnings per share rising 8.1% year over year, compared with its earlier estimate of 6.2%. As of mid-week, with about 40% of S&P 500 companies having reported, 72% of companies have beaten Wall Street analysts’ estimates on the top line and 76% exceeded estimates on the bottom line. “As a result, the ability of stronger-than-expected Q2 EPS to move the market is subsiding, and will likely be replaced by expectations for an improvement in the pace of U.S. economic growth,” CFRA analyst Sam Stovall wrote in a note to clients.
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