Stocks Show Late-Session Resiliency to Conclude Heavy Week

U.S. stocks saw a late-day push to finish higher to close out the final session of a robust and volatile week. The Nasdaq rallied on favorable earnings results from market heavyweights Dow member Apple, Amazon and Facebook. However, Google parent Alphabet's profit report faced heavy scrutiny, along with results from Dow members Exxon Mobil and Chevron. Uncertainty regarding the size, scope and timing of an expected next wave of fiscal relief measures likely stymied some conviction as lawmakers remained at odds. Treasury yields dipped as bond prices nudged higher, while the U.S. dollar chipped away at a recent tumble. Gold resumed a record rally and crude oil prices rose modestly. In economic news, personal income and spending figures came in mixed, consumer sentiment was revised down by a larger amount than expected, but Chicago manufacturing activity unexpectedly jumped back into expansion territory. Europe dropped late in the day amid the slide in the U.S. and after another dose of downbeat GDP data in the region. Asia finished mixed despite some upbeat economic data out of Japan and China.

The Dow Jones Industrial Average advanced 115 points (0.4%) to 26,428, the S&P 500 Index increased 25 points (0.8%) to 3,271, and the Nasdaq Composite rose 157 points (1.5%) to 10,745. In heavy volume, 1.3 billion shares were traded on the NYSE and 4.4 billion shares changed hands on the NASDAQ. WTI crude moved up $0.35 at $40.27 per barrel and wholesale gasoline lost $0.02 to $1.17 per gallon. Elsewhere, the Bloomberg gold spot price was $17.77 higher at $1,974.41 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.4% to 93.44. Markets finished mixed for the week, as the DJIA dipped 0.2%, while the S&P 500 increased 1.7% and the Nasdaq Composite rallied 3.7%.

Dow member Apple Inc. (AAPL $425) reported fiscal Q3 earnings-per-share (EPS) of $2.58, above the $2.05 FactSet estimate, as revenues rose 11.0% year-over-year (y/y) to $59.7 billion, well above the Street's projection of $52.2 billion. The company's iPhone, iPad, Mac and wearables, home and accessories revenues all came in above expectations, while its services revenues also exceeded forecasts. Separately, AAPL announced a 4-for-1 stock split for shareholders of record on August 24, 2020. Shares were nicely higher.

Amazon.com Inc. (AMZN $3,165) posted Q2 EPS of $10.30, easily exceeding the Street's expectations of $1.48, as revenues grew 40.0% y/y to $88.9 billion, above the projected $81.5 billion. AMZN issued Q3 revenue guidance that was north of estimates. Shares gained solid ground.

Google parent, Alphabet Inc. (GOOGL $1,488) announced Q2 profits of $10.13 per share, topping the expected $7.94, as revenues declined 2.0% y/y to $38.3 billion, above the forecasted $37.3 billion. The company said its results were driven by gradual improvement in its ads business and strong growth in Google Cloud and other revenues as it continues to navigate through a difficult global economic environment. GOOGL announced a plan to repurchase up to an additional $28.0 billion of its Class C capital stock. Shares were lower.

Facebook Inc. (FB $254) achieved Q2 EPS of $1.80, exceeding the expected $1.39, as revenues rose 11.0% y/y to $18.7 billion, north of the projected $17.3 billion, with advertising growth up 10.0%. FB said engagement in its daily and monthly active users increased as people around the world sheltered in place and used its products to connect with the people and organizations they care about. FB added that as shelter in place restrictions continue to ease, it expects the number of daily and monthly active users to be flat or slightly down in Q3 compared to Q2. Shares rallied.

Dow component Exxon Mobil Corporation (XOM $42) reported a Q2 loss of $0.26 per share, or a shortfall of $0.70 per share ex-items, compared to the estimated loss of $0.61 per share, as upstream earnings—exploration and production—fell more than expected y/y, while its downstream unit—refining—posted an unexpected profit on international strength. XOM overcame early losses and finished higher.

Dow member Chevron Corporation (CVX $84) posted a Q2 loss of $4.44 per share, or a shortfall of $1.59 per share ex-items, compared to the anticipated loss of $0.93 per share. CVX said the economic impact of the response to COVID-19 significantly reduced demand for its products and lowered commodity prices. CVX added that while demand and commodity prices have shown signs of recovery, they are not back to pre-pandemic levels, and financial results may continue to be depressed into Q3. Shares fell.

Dow component Merck & Co Inc. (MRK $80) announced Q2 EPS of $1.18, or $1.37 ex-items, compared to the projected $1.08, as revenues declined 8.0% y/y, reflecting the negative impact of COVID-19, to $10.9 billion, exceeding the forecasted $10.5 billion. MRK raised its full-year earnings and revenue guidance, including the current assumption of the impact of the COVID-19 pandemic, which is expected to be partially offset by favorability from continued underlying business strength. Shares gained ground.

Dow member Caterpillar Inc. (CAT $133) reported Q2 EPS of $0.84, or $1.03 ex-items, topping the expected $0.64, with revenues dropping 31.0% y/y to $10.0 billion, exceeding the forecasted $9.3 billion. The company said financial results for the remainder of 2020 will be impacted by continued global economic uncertainty due to the COVID-19 pandemic and as such it continues to not provide full-year guidance. Shares saw pressure.

U.S. stocks were mixed on the week with the S&P 500 and Nasdaq posting gains but the Dow seeing red figures as the markets have grappled with a flurry of data and events. Continued progress on the Health Care sector's fight to find an answer to the pandemic was countered by flaring up new COVID-19 cases globally. Although the Fed continued to stress that it will do whatever and for a long as needed to help bridge the gap from the disruption to pre-pandemic economic conditions, an expected new wave of fiscal relief remained elusive a lawmakers appear at odds regarding what the ultimate package will look like.

However, the busiest week of earnings season delivered results that beat estimates at rates above longer-term averages. Thus far, of the 311 S&P 500 companies that have reported results, roughly 66% have exceeded revenue projections and nearly 85% have bested earnings forecasts, per data compiled by Bloomberg. Real Estate, Information Technology, Consumer Discretionary and Communications Services sectors led weekly advancers, while Energy, Materials, Financials and Industrials posted negative figures.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Running on Faith: Are Stocks Discounting Too Powerful an Earnings Recovery?, how earnings have so far bested an extremely low bar, but stocks may be discounting too swift a recovery; while concentration, courtesy of the "big five," represents potentially significant risk. However, she points out that there are fundamental differences between 2000 and 2020.

For timely commentary, you can follow the experts from the Schwab Center for Financial Research (SCFR) on Twitter at @SchwabResearch, and you can visit www.schwab.com/volatility to find more analysis and strategies on the current market environment.

Personal income and spending mixed, regional manufacturing output jumps back into expansion

Personal income (chart) fell by 1.1% month-over-month (m/m) in June, versus the Bloomberg forecast of a 0.6% drop, and following May's downwardly-revised 4.4% fall. However, personal spending jumped 5.6%, above the forecasted 5.2% rise and versus the prior month's upwardly-adjusted 8.5% gain. The June savings rate as a percentage of disposable income was 19.0% down from May's negatively-adjusted 24.2% surge. The PCE Deflator rose 0.4% m/m, matching expectations and compared to the prior month's unrevised 0.1% gain. Compared to last year, the deflator was 0.8% higher, below estimates of a 0.9% rise and compared to May's unadjusted 0.5% gain. Excluding food and energy, the PCE Core Index rose 0.2% m/m, in line with expectations and May's upwardly-revised rise. The index was 0.9% higher y/y, versus estimates to match May's unadjusted 1.0% increase.

The July final University of Michigan Consumer Sentiment Index (chart) was revised lower to 72.5, versus expectations for an adjustment to 72.9, from the preliminary 73.2 reading. The negative revision came as both the current conditions and expectations components of the survey were adjusted to lower levels than initially-reported. Both portions of the survey were lower versus June, along with the overall index, which declined from the prior month's 78.1 level. The 1-year inflation forecast remained at June's 3.0% rate, and the 5-10 year inflation forecast also edged higher to 2.6% from the prior month's 2.5% pace.

The Chicago PMI unexpectedly moved back to a level depicting expansion (a reading above 50). The index increased to 51.9 in July from June's 36.6 level, and versus forecasts calling for a rise to 44.0.

The Q2 Employment Cost Index rose 0.5%, below estimates of a 0.6% gain and versus Q1's unadjusted 0.8% increase.

Treasuries ticked higher, with the yields on the 2-year and 10-year notes, along with the 30-year bond, dipping 1 basis point to 0.11%, 0.54% and 1.20%, respectively. Schwab's Chief Fixed Income Strategist Kathy Jones offers her 2020 Mid-Year Outlook: Fixed Income, noting how interest rates are likely to stay low as markets try to bridge the economic gap to the new normal. Meanwhile, the moves come after this week's continued dovish tone from the Fed as it left its monetary policy stance unchanged as discussed by Schwab's Liz Ann Sonders in her article, Policy of Truth: Fed Holds Rates Steady Amid Somber Outlook.

Treasury yields saw renewed pressure on the week and the U.S. dollar extended a recent drop to levels not seen since 2018, while gold rallied to record highs and crude oil prices slipped. Alongside the heavy week of earnings and the Fed's decisively dovish stance, the economic calendar delivered some mixed data points. Q2 GDP plunged by a record quarter-over-quarter (q/q) annualized rate of 32.9% and initial weekly jobless claims remained uncomfortably high and north of 1 million, while housing and regional manufacturing activity continued to paint a recovery picture.

Looking ahead to next week, with earnings season continuing to roll on, the economic calendar is poised to offer some data points that could garner some attention. ISM and Markit will deliver key July reads on manufacturing and services sector activity, which will be accompanied by the trade balance. However, data on the employment front is likely to carry the most weight as the markets look to see if the economic recovery will persist, with ADP delivering its private sector payroll figures for July and jobless claims for the week ended August 1st hitting the tape. However, the headlining report will likely be Friday's non-farm Labor Report, expected to show roughly 1.5 million jobs were added to payrolls in July.

Europe lower on data on both sides of the pond, U.S. fiscal relief uncertainty

European equities finished lower, with the flood of upbeat earnings reports from the mega-market capitalization stocks out of the U.S. being countered by Q2 GDP reports on this side of the pond that continued to show the dramatic plunge in growth due to the COVID-19 pandemic. Also, earnings results in the region fostered a mixed reaction as results poured in from the financial and energy sectors, while the U.S. fiscal relief uncertainty appeared to apply some pressure late in the session. Eurozone Q2 GDP fell 15.2% y/y, larger than the expected 14.5% drop as Spain and France logged record declines in output. The euro modestly trimmed a recent rally versus the U.S. dollar, and the British pound ticked higher. Bond yields in the region were higher. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his 2020 Mid-Year Outlook: Global Stocks and Economy, noting that in our 2020

Global Market Outlook, we cited many indicators pointing to heightened risk of a recession; now we highlight increasing signs of a recovery from one. However, Jeff adds that investor caution may still be warranted as stocks have priced in a recovery during the second quarter, leaving the potential for the pace or success of the recovery to disappoint. He concludes that new cycles usually come with new market leadership, and new market leadership by sector, style and geography could emerge in the second half of the year, catching some investors by surprise.

The U.K. FTSE 100 Index fell 1.5%, France's CAC-40 Index decreased 1.4%, Germany's DAX Index declined 0.5%, Italy's FTSE MIB Index was down 0.7%, Spain's IBEX 35 Index dropped 1.7%, and Switzerland's Swiss Market Index declined 0.9%.

Asia mixed following flood of data

Stocks in Asia finished mixed as the markets continued to digest the heavy week of data that continued to illustrate the severe impact of the COVID-19 pandemic, headlined by the record plunge in Q2 GDP out of the U.S., but also has offered some signs of recovery. Also, the uncertainty regarding the size and timing of the expected next wave of U.S. fiscal stimulus measures continued to keep conviction in check as some key relief measures are set to expire. Schwab's Jeffrey Kleintop discusses in his latest article, Stock Market Reaction to Expiring COVID-19 Programs, how if not extended or replaced, the fading support for the unemployed raises the risk of weakening economic momentum, turning the V-shaped recovery into a W. China reported July manufacturing growth unexpectedly accelerated and its services sector output continued to expand, while Japan's preliminary June industrial production came in much stronger than expected. Japan's Nikkei 225 Index fell 2.8% despite the data, with the yen continuing to rally, while China's Shanghai Composite Index rose 0.7%. Hong Kong's Hang Seng Index declined 0.5% and Australia's S&P/ASX 200 Index dropped by 2.0%. South Korea's Kospi Index declined 0.8% and India's S&P BSE Sensex 30 Index dipped 0.3%.

Next week's international economic calendar will be busy, headlined by a plethora of global manufacturing and services PMI reports. Other noteworthy reports include: Australia—Reserve Bank of Australia monetary policy decision and trade figures. China—trade balance. India—Reserve Bank of India monetary policy decision. Japan—Q2 GDP and household spending. Eurozone—retail sales, along with German factory orders, industrial production and trade balance. U.K.—Bank of England monetary policy decision.

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Stocks Show Late-Session Resiliency to Conclude Heavy Week

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