Stocks Lose Steam to Finish Lower

U.S. equities finished lower in another bumpy trading session, as re-energized near-term rate cut expectations came up against a mixed bag of earnings and economic news, as well as elevated geopolitical tensions following Iran's seizure of a U.K. tanker. Dow member Microsoft posted better-than-expected Q2 results, and investors shrugged off Dow component Boeing's $4.9 billion projected charge related to the grounding of its 737 MAX jets, while American Express was a drag on the Dow amid closer scrutiny of its outlook. Treasury yields and the U.S. dollar were higher following a slight increase in consumer sentiment, while crude oil prices were modestly higher and gold tumbled.

The Dow Jones Industrial Average (DJIA) fell 69 points (0.3%) to 27,154, the S&P 500 Index shed 19 points (0.6%) to 2,977, and the Nasdaq Composite decreased 61 points (0.7%) to 8,147. In moderate volume, 802 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq. WTI crude oil added $0.42 to $55.76 per barrel and wholesale gasoline was up $0.01 at $1.84 per gallon. Elsewhere, the Bloomberg gold spot price tumbled $20.79 to $1,425.31 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—gained 0.4% to 97.17. Markets were lower for the week, as the DJIA decreased 0.7%, while the S&P 500 Index and the Nasdaq Composite lost 1.2%.

Dow member Microsoft Corporation (MSFT $137) reported fiscal Q4 earnings-per-share (EPS) of $1.71, or $1.37 ex-items, versus the $1.21 FactSet estimate, as revenues rose 12.0% year-over-year (y/y) to $33.7 billion, compared to the forecasted $32.8 billion. The company's revenues from its productivity and business processes, intelligent cloud, and personal computing units all topped the Street's expectation, and its operating margin also exceeded analysts' estimates. MSFT's commercial cloud unit was a standout after its revenues rose 39% y/y to post the strongest quarter ever. Shares traded higher.

Dow component American Express Company (AXP $125) posted Q2 EPS of $2.07, above the forecasted $2.03, with revenues rising 8.4% y/y to $10.8 billion, roughly in line with expectations. The company's non-interest revenues topped estimates and its net interest income matched forecasts, while its provision for losses was smaller than anticipated. AXP reaffirmed its full-year guidance, and announced plans to increase its quarterly dividend by about 10% to $0.43 per share. Shares were lower as analysts scrutinized the company's EPS outlook, which it said on a conference call that it expects to come in near the middle of its range, and the rise in expenses due to the ramp-up of its rewards program.

Dow member Boeing Company (BA $377) announced that it expects to record an after-tax charge of $4.9 billion in connection to the grounding of its 737 MAX airplanes. Shares were nicely higher despite the charge. The report, which included tentative expectations for the 737 MAX jets to return to service in early Q4 and 2020 production plans of a gradual increase, appears to be fostering some relief among analysts as it adds some clarity to the 737 MAX issue.

July consumer sentiment ticks higher, modestly misses estimates

The July preliminary University of Michigan Consumer Sentiment Index (chart) nudged higher to 98.4 from June's read of 98.2, but slightly below the 98.8 Bloomberg expectation. A dip in the current conditions component of the index was offset by a rise in the index of consumer expectations. The 1-year inflation forecast dipped to 2.6% from 2.7%, but the 5-10 year inflation forecast rose to 2.6% from the previous 2.3% rate.

Treasuries were lower, as the yield on the 2-year note rose 3 basis points (bps) to 1.81%, while the yields on the 10-year note and the 30-year bond ticked 1 basis point higher to 2.05% and 2.57%, respectively. For a look at the bond markets check out Schwab's Chief Fixed Income Strategist Kathy Jones' 2019 Mid-Year Outlook: Rate Expectations, where we discuss that recession risk is rising, but markets expect central banks to keep it at bay by cutting short-term interest rates and address if it will it be enough to keep the stock market rally going. Bond yields and the U.S. dollar are moving higher despite more commentary from Fed officials yesterday that continued to suggest the Central Bank could deliver a rate cut to combat slowing economic growth and lingering trade uncertainty.

Schwab’s Chief Investment Strategist Liz Ann Sonders notes in her latest article, Round Here: Bulls Celebrate Round Numbers for U.S. Indexes, last week the S&P crossed 3k; which followed the Dow’s 27k cross and the NASDAQ’s 8k cross last month; with small caps not in gear. She adds that round numbers are more psychological than technically-important and have helped boost most measures of investor sentiment back into optimistic territory. Liz Ann concludes that round number cheering is being accompanied by rate cut cheering, with stocks (perversely?) cheering weaker economic news in the interest of easier monetary policy.

Europe mixed, Asia higher on Fed rate cut hopes and data

European equities finished mixed, with expectations of an imminent rate cut out of the U.S. continuing to climb on the heels of commentary from Fed officials yesterday. The euro and British pound lost ground as the U.S. dollar found support despite the comments, while bond yields in the region were mostly lower. Italian political uncertainty has also ramped back up, which pressured stocks in the nation, while shares of Publicis Group SA (PUBGY $12) fell after the French advertising firm lowered its revenue outlook. Anheuser-Busch InBev NV(BUD $94) was higher after announcing an agreement to sell its Australian business for about $11.3 billion to Japan's Asahi Group Holdings Ltd. (ASBRF $46). Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Valuations Hold A Surprising Message For Stock Market Investors, in which he points out that valuations suggest international stocks may produce above average, double-digit annualized total returns over the next 10 years, in contrast to below average, mid-single digit returns for U.S. stocks.

Stocks in Asia finished mostly higher, with earnings season rolling on and coming in mostly better than expected, while U.S. rate cut expectations were supported by commentary from some Fed officials that suggested the Central Bank should act quickly to counter slowing economic activity and trade concerns. Japanese equities rallied, with the yen giving back some recent gains, while the nation's consumer price inflation rose in line with expectations for June. Stocks in mainland China and Hong Kong advanced, while markets in Australia moved higher, led by the materials and financials sectors, and South Korean securities increased on the heels of yesterday's unexpected rate cut from the Bank of Korea. However, shares in India fell amid festering worries about the country's recently-released budget. Schwab's Jeffrey Kleintop, CFA, offers his Global Stocks Mid-Year Outlook, in which he points out that in the second half of 2019, stock markets around the world will likely have to contend with slowing global economic growth as leading indicators point to an increasingly vulnerable world economy that may be worsened by shocks from trade tariffs and other factors. Jeff also discusses ways for investors to potentially benefit from opportunities for performance and diversification.

Stocks slip slightly from record high territory amid flood of data, trade and Fed focus

U.S. stocks slightly slipped from last week's return to unchartered territory, as earnings season heated up, trade uncertainty lingered and the markets grappled with mixed economic data and the implications for a Fed rate cut. Q2 earnings season ramped up with a focus on the financial sector, with Dow member Goldman Sachs Group Inc. (GS $214) highlighting the group as the Street cheered its results that included stronger-than-expected revenues from its investment banking and investing & lending units. However, the other major banks saw some scrutiny as net interest income came in mostly softer than expected but the results on the whole did suggest the all-important U.S. consumer remains healthy. The transportation sector was also in focus, with United Airlines Holdings Inc. (UAL $94) continuing the string of upbeat results from the carriers, while rail companies saw mixed performance, as CSX Corporation (CSX $70) fell after missing earnings forecasts and lowering its revenue outlook, but improved efficiency out of Union Pacific Corporation(UNP $175) helped top profit projections to foster a rally in its shares. With 15% of the S&P 500 companies having reported thus far, about 61% have topped revenue estimates and nearly 78% have bested earnings forecasts, per data compiled by Bloomberg.

The economic front seemed to throw a wrench at elevated Fed rate cut expectations and apply some pressure to the markets, as June retail sales posted another stronger-than-expected month, July reads on regional manufacturing activity suggested a potential return to expansion, and the Fed's Beige Book signaled that business activity across the nation continued to grow. The reports followed recent data showing inflation was a bit warm and nonfarm employment growth rebounded. However, July rate cut expectations lingered amid some late-week dovish Fed commentary and as the Index of Leading Economic Indicators declined for the first time this year and the Fed's industrial production report came in flat. The U.S. dollar gained ground, though Treasury yields saw some pressure, along with crude oil prices. Gold continued a rally, breaking out of a key technical level to reach highs not seen since 2013.

Next week is poised to offer another robust slate of potential market-moving data, with earnings season continuing to kick into high gear and the economic calendar chock full of reports to digest leading up to the July 31st Fed monetary policy decision. Existing and new home sales will give reads on the housing sector, Markit will deliver timely looks at manufacturing and services sector activity, durable goods orders will show demand for goods meant to last three years or more, and we will get the first look (of three) at Q2 GDP.

As noted in our latest Schwab Market Perspective: Be Careful What You Wish For, U.S. stock indexes reached new highs but we are concerned that the potential good news is already mostly reflected, while the potential bad news is being largely ignored. Earnings season started with reduced expectations, leading to the possibility of upside surprises. Meanwhile, the Fed seems likely to cut rates, but the impact may be diminished, while recent economic data shows reason for concern. Earnings, especially for financial companies, could differ between the United States and international regions due to diverging global central bank actions.

Next week's international economic docket will be a bit lighter than usual, with preliminary Eurozone manufacturing and services sector PMIs, German business confidence, and the European Central Bank monetary policy decision being notable events.

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Stocks Lose Steam to Finish Lower

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