Stocks Tumble as Earnings, Data Sap Recent Optimism

The U.S. equity markets finished with solid losses, dousing early notion of stocks finishing with weekly gains, as a slew of earnings and economic data continued to illustrate the dramatic disruption of the COVID-19 pandemic, and after President Trump threatened to slap new tariffs on China over its role in the coronavirus pandemic. The negative sentiment overshadowed recent optimism of the slow reopening of the U.S. economy and recent signs of progress on the virus treatment front out of the biotech sector. On the earnings front, Dow member Apple posted stronger-than-expected Q2 results but held off on providing Q3 guidance, while Amazon reported mixed results. Dow components Exxon Mobil and Chevron posted earnings north of the Street's estimates but reduced their 2020 capital and operating expenditures, and Clorox rallied on its results and guidance. More disappointing economic news hit the tape, as April manufacturing reports from ISM and Markit both showed the contraction in the sector intensified. Treasury yields and the U.S. dollar were little changed, while gold and crude oil prices finished higher. Overseas, most markets were closed for holidays, but those that were open for business posted losses.

The Dow Jones Industrial Average fell 622 points (2.6%) to 23,724, the S&P 500 Index decreased 82 points (2.8%) to 2,831 and the Nasdaq Composite declined 285 points (3.2%) to 8,605. In moderately heavy volume, 923 million shares were traded on the NYSE and 3.7 billion shares changed hands on the NASDAQ. WTI crude oil gained $0.94 to $19.78 per barrel and wholesale gasoline lost $0.01 to $0.77 per gallon. Elsewhere, the Bloomberg gold spot price was $12.81 higher at $1,699.31 per ounce, while the Dollar Index — comparison of the U.S. dollar to six major world currencies— was little changed at 99.04. Markets were lower for the week, as the DJIA and the S&P 500 fell 0.2%, while the Nasdaq Composite shed 0.3%.

Dow member Apple Inc. (AAPL $289) reported fiscal Q2 earnings-per-share (EPS) of $2.55, up 4.0% year-over-year (y/y) and above the $2.24 FactSet estimate, with revenues ticking 0.5% higher y/y to $58.3 billion, north of the Street's $54.8 billion estimate. The company's iPhone, iPad and Mac revenues all topped forecasts, while its wearables, home and accessories sales were a bit shy of expectations. AAPL's services revenues came in north of expectations. The company declined to give guidance for Q3 but announced that it has authorized an increase of $50.0 billion to its existing share repurchase program and an increase of 6.0% to its quarterly dividend to $0.80 per share.

AAPL said, "Despite COVID-19’s unprecedented global impact, we’re proud to report that Apple grew for the quarter, driven by an all-time record in Services and a quarterly record for Wearables." The company added that in this difficult environment, its users are depending on its products in renewed ways to stay connected, informed, creative, and productive. Shares finished lower.

Amazon.com Inc. (AMZN $2,286) posted Q1 EPS of $5.01, down from $7.09 a year ago, and compared to the forecasted $6.22, as revenues grew 26.4% y/y to $75.5 billion, north of the projected $73.7 billion. AMZN issued Q2 revenue guidance with a midpoint that was above estimates but its operating income outlook came in well below expectations, assuming approximately $4.0 billion of costs related to COVID-19, aimed at getting products to customers and keeping its employees safe. AMZN said, "From online shopping to AWS to Prime Video and Fire TV, the current crisis is demonstrating the adaptability and durability of Amazon’s business as never before, but it's also the hardest time we've ever faced." Shares fell.

Dow component Exxon Mobil Corporation (XOM $43) announced a Q1 loss of $0.14 per share, or profits of $0.53 per share ex-items, dipping from the $0.55 posted a year ago, and compared to the forecasted earnings of $0.01 per share. XOM's capital expenditures during the quarter were up slightly y/y at $7.1 billion and north of the estimated $6.1 billion. The company said it will reduce its capital and operating expenditures for 2020 to manage unprecedented market challenges.

XOM said, "COVID-19 has significantly impacted near-term demand, resulting in oversupplied markets and unprecedented pressure on commodity prices and margins," adding that "While we manage through these challenging times, we are not losing sight of the long-term fundamentals that drive our business." The company also noted that economic activity will return, and populations and standards of living will increase, which will in turn drive demand for its products and a recovery of the industry. Shares traded solidly lower.

Dow member Chevron Corporation (CVX $89) reported Q1 EPS of $1.93, including a gain associated with exploration and production—upstream—assets in the Philippines and favorable tax items, while foreign currency effects increased earnings. This compared to profits of $1.39 per share a year ago, and versus EPS of $0.65 that was expected. The company said it is further reducing its 2020 capital expenditure guidance by up to $2.0 billion to $14.0 billion. In addition, the company estimates that 2020 operating costs will decrease by $1.0 billion, following its previously announced suspension of share repurchases and the completion of additional asset sales. Shares were lower.

Severe supply and demand shocks have pummeled energy prices to hamper the sector, but the sector has rallied sharply from the March 23rdlows. For an in-depth look at the energy sector and rationale for us maintaining our market perform rating, check out Managing Director and Senior Investment Strategist with Charles Schwab Investment Advisory, Inc., David Kastner's, CFA, latest Schwab Sector Views: Energy Sector Blues.

Clorox Company (CLX $193) reported a fiscal Q3 profit of $1.89 per share, compared to the $1.44 a year ago, above the Street's forecast of $1.67 per share, on a 15% increase in sales to $1.78 billion, also topping expectations of $1.71 billion. The consumer product maker said it saw a 32% jump in revenue from its cleaning segment, citing increased consumer demand for its disinfectant wipes, bleach and Pine-Sol items amid the coronavirus pandemic. As a result CLX said it sees growth in organic sales for the year—excluding acquisitions, divestitures and foreign exchange—in a range of 6% to 8% and full-year EPS of $6.70 to $6.90, well above earlier guidance provided in February of sales growth of 2% and EPS of $6.25. Shares of CLX rallied.

Earnings estimates have been slashed and are likely to be further reduced amid the disruption of the COVID-19 (coronavirus) pandemic, while the stock markets have staged an impressive rally off of the March 23rd lows. Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, Loss, Strain & Butterflies: Earnings Plunging, Stocks Ignoring, noting how stocks and earnings don't always travel in the same direction. However, she adds that net earnings revisions do tend to track more consistently with how stocks are performing; and her best guess is that there are more downward earnings revisions to come. Liz Ann concludes that perhaps she is being naïve, but she would think the ride will remain quite bumpy—at least throughout the remainder of earnings season.

Amid the heightened volatility in the markets, for timely news and analysis follow Schwab experts from the SCFR on Twitter at @SchwabResearch, and for helpful insight and information on the current market environment, check out our Q&A With Schwab Experts on Recent Market Volatility. Finally, investors can stay up-to-date on all the content that Schwab offers on the unparalleled market action at www.schwab.com/volatility.

April manufacturing output falls deeper into contraction territory, Treasury yields little changed

The April Institute for Supply Management(ISM) Manufacturing Index (chart) fell to 41.5 from March's unrevised 49.1 level, but above the Bloomberg forecast of a drop to 36.0. The index fell further into contraction territory (a reading below 50) and hit the lowest level since April 2009 as new orders tumbled to 27.1 from 42.2, production fell to 27.5 from 47.7, and employment dropped to 27.5 from 43.8. The ISM said comments from the survey were "strongly negative" regarding the near-term outlook, with sentiment clearly impacted by the coronavirus pandemic and continuing energy market recession.

The final Markit U.S. Manufacturing PMI Index was revised lower to 36.1 for April, versus expectations to be adjusted to 36.7 from the preliminary estimate of 36.9, and below March's 48.5 level. A reading below 50 denotes contraction. The release is independent and differs from ISM's report, as it has less historic value and Markit weights its index components differently, while it surveys a wider range of companies.

Construction spending (chart) unexpectedly rose, gaining 0.9% month-over-month (m/m) in March, versus projections of a 3.5% drop, and following February's downwardly-revised 2.5% decrease. Residential spending rose 2.3% m/m more than offsetting a 0.1% dip for non-residential spending.

Treasuries were little changed, with the yields on the 2-year and 10-year notes were flat at 0.19% and 0.64%, respectively, while the yield on the 30-year bond ticked 1 basis point (bp) lower to 1.27%.

Schwab's Chief Fixed Income Strategist Kathy Jones offers insight into how to invest in the bond markets during this unprecedented time in her Q2 Bond Market Outlook: Looking Beyond the Coronavirus Crisis, in which she notes that while the COVID-19 crisis is far from over, we expect central bank and government policies to be key to performance in the second quarter. Moreover, Schwab's Fixed Income Director, Cooper Howard, CFA, discusses the heightened focus on the municipal bond markets in his article, Coronavirus and the Municipal Bond Market: Questions and Answers, while Fixed Income Strategist, Collin Martin, CFA, delivers a look at What Happens When a Corporate Bond is Downgraded?

Limited open markets overseas finish lower

The U.K. equity markets traded lower, with the FTSE 100 Index dropping 2.3%, though volume was much lighter than usual as the rest of the major European markets were closed for the Labour Day holiday. The global markets have trimmed a recent rally as economic and earnings reports of late have illustrated the severe disruption of the coronavirus, overshadowing cautious optimism of the reopening of the U.S. economy and some signs of potential progress on the treatment of the virus out of the healthcare sector. The European Central Bank disappointed the markets yesterday with its lack of expanded asset purchases and forecast of a sharp drop in GDP for this year. In economic news in the region, Markit's U.K. PMI Manufacturing Index was revised to a deeper contraction for April than had been initially reported. Crude oil prices continued to recover, while U.K. bond yields nudged higher and the British pound fell versus the U.S. dollar. Schwab's Chief Global Investment Strategist, Jeffrey Kleintop, provides a look at monitoring the progress of global economic reopenings in his latest commentary, Dashboards: Measuring Recovery In Real Time, discussing how the key for the markets is assessing the pace and success of a recovery.

Stocks in Asia fell to close out the week, with recent economic and earnings data painting a dire picture regarding the negative impact of the coronavirus pandemic, which is expected to continue this quarter. The reminder of the economic disruption appeared to overshadow rising optimism of the reopening of the U.S. economy and positive developments on the virus treatment front out of the healthcare sector. Economic data in the region remained disappointing with South Korean exports for April falling sharply and Japan's Manufacturing PMI being revised to a deeper contraction than initially reported for last month. Japan's Nikkei 225 Index dropped 2.8%, with the yen gaining some ground late in the session, while Australia's S&P/ASX 200 Index fell 5.0%, as financials, energy and materials issues saw heavy pressure. However, volume was much lighter than usual as markets in China, Hong Kong, South Korea and India were closed for holidays. Schwab's Jeffrey Kleintop, notes in his commentary, What Will The Recovery Look Like?, how early signs in Asia of a V-shaped rebound are encouraging, but may instead look more like a square root, flattening out as weaker global growth saps Asian economic momentum in the second quarter. Jeff concludes with noting that emerging markets, led by China and South Korea, are leading the recovery in the economy and markets as they did during the global recessions of 2000-02 and 2008-09.

Stocks limp into the week's finish line

U.S. stocks relinquished an early advance and finished slightly south of the flatline on the week that saw volatility remain elevated as the markets continued to grapple with the coronavirus pandemic. The S&P 500 continued its recent bounce off of the March 23rd lows as the week began, supported by optimism regarding the slow reopening of the U.S. economy, which is the world's largest. Positive sentiment was also fueled by signs a treatment for COVID-19 might come sooner than expected after Gilead Sciences Inc. (GILD $80) announced upbeat trial results of its investigational antiviral drug, remdesivir, conducted by the biotech company and also by the National Institute of Allergy and Infectious Diseases (NIAID). The massive amount of fiscal and monetary policy stimulus measures added another layer of support for the first half of the week rally that put the finishing touches on an historic April gain for the S&P 500, which posted the largest increase since 1987 and the third biggest gain since World War II. The Fed, as expected held its monetary policy stance unchanged but reiterated that it will do whatever it takes to get the economy back to its dual mandate of maximum employment and price stability.

However, as the second half of the week rolled around the equity markets reversed to the downside, as the markets appeared to focus on economic data showing the drastic impact of coronavirus and preserving elevated expectations that rougher waters may lie ahead. Earnings results also chipped in as the season ramped up, with Q1 reports illustrating the beginning of the negative impact and guidance remaining elusive to keep the Street flying blind on what may be in the offing in Q2 and possibly beyond. Exacerbating the late week pullback was some downbeat comments about the timing of the reopening of the key state of New York and as President Donald Trump threatened tariff actions or some form of punishment on China for its potential role in spreading COVID-19.

The first look at Q1 GDP showed a near 5.0% contraction on a quarter-over-quarter annualized basis, as personal consumption tumbled, regional manufacturing reports for April showed contractions deepened, Consumer Confidence posted an historic drop—though the expectations sub-component of the index improved—while personal spending fell sharply, along with pending home sales, in March. Thus far, of the 278 S&P 500 companies that have reported Q1 earnings, roughly 64% have topped revenue estimates and nearly 70% bested profit projections, per data compiled by Bloomberg. To date, Bloomberg is calculating that revenue growth sits at roughly 1.0% y/y and earnings growth is on track to fall by approximately 9.0%. The U.S. dollar pulled back on the week, the Treasury yield curve steepened and gold prices fell. The energy sector was a standout winner as crude oil prices continued to recover from turmoil as of late. Communications services, materials, financials and technology issues also posted weekly gains, but utilities, healthcare, and consumer-related sectors all fell noticeably.

Next week, earnings season will remain in focus, and the economic calendar will continue to offer insight into the economic damage due to the coronavirus. March factory orders will get the ball rolling and will be followed by March trade figures and Q1 nonfarm productivity and unit labor costs. However, more timely reads will come in the form of initial jobless claims for the week ended May 2nd, while the ISM and Markit will deliver their April reports on the key non-manufacturing sector. However, the week will culminate with the April nonfarm payroll report, expected to show 22 million jobs were lost, after March's near 700,000 drop.

Our latest Schwab Market Perspective: Waiting for the Coronavirus Peak, notes that the COVID-19 pandemic has severely affected the U.S. economy, with containment efforts leading to widespread business closings and surging unemployment—and stock market volatility. The article addresses the key questions of when can the economy reopen, and what happens when it does?

Next week's international calendar will also be robust and deliver potential market-moving data, with reports worth noting including: Australia—Reserve Bank of Australia monetary policy decision, retail sales and trade figures. China—Caixin's Composite PMI and trade balance. India—Markit's PMI Composite Index. Japan—labor earnings and household spending. Eurozone—Markit's final Eurozone Composite PMI, retail sales and investor confidence, along with German factory orders, industrial production and trade balance. U.K.—Bank of England monetary policy decision, consumer confidence and Markit's U.K. Composite PMI.

Important Disclosures

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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Stocks Tumble as Earnings, Data Sap Recent Optimism

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