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Ignoring D.C. Squabbles, Market Zeros in On Mostly Positive Earnings Flow

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October 25, 2017

(Wednesday Market Open) We’ve said it before and probably will say it again: Earnings drive the markets. That’s certainly been the case so far this week as major indices hit new record highs Tuesday and investors seemed to ignore the noise coming out of Washington, D.C. That said, pre-market trading pointed toward a slightly lower open Wednesday.

Boeing (BA), Visa (V) and CocaCola (KO) are three of the major names on today’s earnings calendar, and each company topped analysts’ estimates. Keep in mind there's some economic data also on tap, including durable goods orders for September, new home sales, and weekly crude oil inventories.

Looking at this morning’s earnings scorecard, BA raised its full-year guidance and also beat analysts’ top- and bottom-line expectations, saying it delivered a record number of commercial planes in Q3. KO also came in ahead of analysts’ expectations on earnings and revenue, although its soda volume was flat. V said it sees solid growth in 2018. So news from these big three generally looked pretty good.

Things could get really interesting Thursday afternoon when a tech triumvirate steps up to bat with reports from Microsoft (MSFT), Alphabet (GOOG), and Amazon (AMZN). There won’t be much time to come up for breath after that as Friday morning brings results from two of the oil supermajors, Chevron (CVX) and ExxonMobil (XOM).

Also stay tuned Thursday for the conclusion of the European Central Bank (ECB) meeting. Investors might find out tomorrow morning if the ECB plans to make any changes to its stimulus program.

Additionally, there’s been a ton of noise coming out of Washington, D.C., but markets tend to have a laser focus on what’s real. Earnings are generally going up, people are spending money, and there appears to be confidence in the economy. That could help explain why stocks are at record highs even as politicians keep squabbling. Still, keep an eye on D.C. for any new developments on the Republicans’ tax plan, and for a possible announcement of a new Fed chair.

Not all the news was good this morning. Shares of Chipotle (CMG) were getting whacked and were on track to open at their lowest level since 2013 amid disappointing Q3 results and future growth plans. Also, chipmaker Advanced Micro Devices (AMD) was down almost 10% in pre-market trading as the company said margins would remain flat and growth muted. It looked like these results, along with a less than stellar performance from AT&T (T), might put pressure on the broader market early today.

Looking overseas, Japan’s Nikkei snapped its streak of 16 straight positive sessions, but other Asian markets rose. European indices were mixed.

Back home, bond futures continue to get hit, which has led to some thought that the 10-year yield might challenge the 2.5% mark by year-end. The yield on 10-year Treasuries had climbed all the way to 2.44% before Wednesday’s opening bell, the highest it’s been since early this year.

Tuesday’s action might serve as a textbook example of how big company earnings can sometimes put the major indices on different paths. The Dow Jones Industrial Average ($DJI) gained more than 0.7% while the broader S&P 500 Index (SPX) rose just 0.2%. Most of the DJIA’s gains came from two companies that seemed to impress investors with their earnings: Caterpillar (CAT) and 3M (MMM). Shares of CAT rolled up 5% gains while MMM rose nearly 6%, and the materials and industrial sectors made the biggest gains of all sectors aside from financials.

CAT raised its projection for adjusted 2017 earnings by 25%, a major jump and not the kind of thing you see too often from a big, established company. The higher forecast reflected strength in a number of regions and industries, the company said in a press release, including construction in China, on-shore oil and gas in North America, and increased capital investments by mining customers.

That’s a deep dive into one company’s situation, something we don’t do too often here, but it’s important to note because CAT’s strong outlook arguably speaks to key economic trends that could be playing out not just at CAT but across other companies as well; namely the strength in China and the growing demand for North American energy. It could be interesting to see if some of the other multinationals report the same sort of global boost.

While there’s been a lot of focus on the so-called “tail wagging the dog” aspect of earnings, meaning that U.S. companies’ sales strength overseas could be supporting overall results, that hasn’t necessarily been the case so far this earnings season. McDonald’s (MCD), for instance, reported a big gain in global sales but also saw 3Q U.S. same-store sales up 4%. Sales at MMM on an organic, local-currency basis grew 13% in Asia-Pacific and 4% in Europe, Middle East and Africa, but also rose 3.6% in the U.S., the company said.

As industrials, financials, materials and some of the other so-called “cyclical” sectors rallied Tuesday, some of the more “defensive” sectors stepped back, including health care, consumer staples, and telecom. Health care was the worst performer of the day, burdened in part by what some investors saw as disappointing earnings from both Eli Lilly (LLY) and Biogen (BIIB).

Bond Yields

FIGURE 1: TEN-YEAR YIELD UP WHILE GOLD PULLS BACK.

Yields on the 10-year U.S. Treasury bond rose above 2.4% Tuesday, a level that’s proven difficult to move above since early this year, as this year-to-date chart shows. Meanwhile, gold — the purple line on the chart — has pulled back pretty sharply from last month’s one-year highs. Combined, this chart might indicate improving investor confidence in the economy. Data source: CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Blast From the Past: One platform of Donald Trump’s campaign last year that arguably helped fire up investor sentiment was his proposal to spend $1 trillion on the nation’s infrastructure, which conceivably would have injected government money into construction and other industrial and materials firms bidding for the work. However, health care and tax reform, along with geopolitical challenges, took infrastructure off the front pages over the last few months and it looked questionable whether a plan might come to light. While there’s still nothing solid in place, a hint recently emerged that the president still has his proposal in mind. A few days ago in a call with congressional Republicans, the president once again talked about spending $1 trillion on infrastructure, The Washington Post reported. Whether this makes headway in Congress is far from certain.

Back Home on the Range? After spending January through August in a trading range of roughly $1,200 to $1,300 an ounce, gold burst through the $1,300 barrier to post new one-year highs above $1,350 in early September as investors seemed to seek “safe havens” during a flurry of geopolitical tensions between the U.S. and North Korea. Those tensions haven’t gone away, but they appear to have simmered down, and that could be weighing on gold. The metal is down about $30 over the last three weeks and recently traded near $1,274. Currently, gold might be getting pressure from the increasing interest rate environment here in the U.S. It could be interesting to watch how gold reacts Thursday when the European Central Bank (ECB) delivers an update on its policy plans. Any signs of tightening in Europe — as some analysts expect we’ll see — could put increased weight on the gold market.

Numbers Watch: It’s easy to overlook economic data in this week of key earnings reports, but a flurry of relatively important numbers cross the wire over the next few days and may bear watching. Today’s new home sales report follows a somewhat disappointing report on existing home sales last Friday that showed sales down 1.5% from a year earlier and supply and price constraints still posing barriers. Thursday’s pending home sales report also looms, and we’ll see if this metric saw any impact from the September hurricanes. On Friday the big number to monitor is the government’s first take on Q3 Gross Domestic Product (GDP). The consensus among Wall Street analysts is for growth of 2.4%, Briefing.com said. That would be down from the final Q2 estimate of 3.1%.

Good Trading,
JJ
@TDAJJKinahan

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Economic Calendar

FIGURE 2: THIS WEEK'S ECONOMIC CALENDAR.

Source: Briefing.com

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