Bulls Fall Short in Attempt to Keep Winning Streak Alive

After a late-day rally that looked like it could erase weekly losses for stocks, the bulls fell short in their attempt to keep the winning streak alive but ended the final session in the green. Upbeat global April business activity reports, led by the U.S., and a solid rebound in home sales preserved optimism of strong 2021 economic output to pare losses that came amid concerns about the implications of rising COVID-19 cases in key pockets of the world, and reports that the White House may be mulling a sizeable hike in capital gains taxes that had roiled the markets. Meanwhile, earnings season continued to roll on and figures remained mostly positive. However, Dow members Intel Corporation and American Express saw pressure as the Street scrutinized their results and guidance, while Mattel rose modestly after posting a smaller-than-expected loss. Treasuries were lower, lifting yields, and the U.S. dollar came under pressure, while gold fell, and crude oil prices were modestly higher. Overseas, Europe finished in the red, but the upbeat economic data helped to pare some of the losses, while markets in Asia were mixed after a choppy week.

The Dow Jones Industrial Average rose 228 points (0.7%) to 34,043, the S&P 500 Index increased 45 points (1.1%) to 4,180, and the Nasdaq Composite jumped 198 points (1.4%) at 14,017. In heavy volume, 778 million shares were traded on the NYSE and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil gained $0.71 to $62.14 per barrel. Elsewhere, the Bloomberg gold spot price was $7.73 lower at $1,776.21 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.6% to 90.82. Markets were lower for the week, as the DJIA moved 0.5% to the downside, the S&P 500 ticked 0.1% lower, and the Nasdaq Composite declined 0.3%.

Dow member Intel Corporation (INTC $59) reported adjusted Q1 earnings-per-share (EPS) of $1.39, above the $1.15 FactSet estimate, as revenues were roughly flat year-over-year (y/y) at $18.6 billion, north of the Street's $17.8 billion forecast. The chipmaker highlighted exceptional demand for its products and noted that this is a pivotal year for the company as it is setting its strategic foundation and investing to accelerate its trajectory and capitalize on the explosive growth in semiconductors that power our increasingly digital world. The company's data center revenue missed forecasts and its gross margins were noticeably down compared to the prior year, but its client computing segment revenues topped forecasts. INTC issued Q2 earnings guidance that was a bit shy of expectations, though it raised its full-year outlook. Shares finished lower.

Dow component American Express Company (AXP $144) posted Q1 EPS of $2.74, including a $1.1 billion benefit related to credit reserve releases that were primarily driven by continued improvement in the macroeconomic outlook and strong credit performance. Analysts had expected the company to report EPS of $1.61. Revenues declined 12.0% y/y to $9.1 billion, compared to the projected $9.2 billion.

AXP said card member spending excluding travel and entertainment categories was 11.0% higher than it was in Q1 of 2019 and continues to represent the majority of spend on its network. The company added that, "We've also seen an uptick across all categories of travel and entertainment spending in the U.S. in recent weeks, increasing our confidence that domestic consumer travel will continue to recover." Shares traded lower.

Mattel Inc. (MAT $21) announced an adjusted Q1 loss of $0.10 per share, versus the $0.35 per share shortfall that the Street had anticipated. Revenues grew 47.0% y/y to $874 million, well above the forecasted $684 million. The company said this was another record quarter, with truly exceptional results reflecting the success of the turnaround, as it continues to drive transformational improvements and acceleration in its business. The toy maker added that following the third consecutive quarter of growing market share, it is strengthening its position as a consistent leader in the toy industry. "We believe we are very well-positioned to improve profitability and accelerate topline growth in 2021 and beyond," Shares were modestly higher.

Q1 earnings season is heating up and per data compiled by Bloomberg, with 121 S&P 500 companies having reported thus far, roughly 75% have topped revenue expectations, while about 76% have exceeded earnings estimates. Although still early, sales growth is on track to be up 5.6% y/y and profit expansion is on pace to be approximately 51% above year ago levels.

Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Pump it Up: Earnings Season Starts Off Strong, although earnings season has a ways to go, the results have been strong enough to significantly boost growth expectations, while also easing some valuation concerns.

Check out our assessments for all the major market sectors, as well as a look at how changes in sector leadership can create opportunities for investors to make tactical changes in our Schwab Sector Views: What is Sector Rotation Strategy?.

Keep up with our latest views on the market landscape, including our latest podcast on 7 Questions at the Top of Investors' Minds, at our Market Insights page on www.schwab.com, and you can follow us on Twitter @SchwabResearch.

Manufacturing and services sector growth remains solid, new home sales jump

The preliminary Markit U.S. Manufacturing PMI Index for April ticked higher to 60.6 from March's unrevised 59.1 figure, moving modestly further into expansion territory denoted by a reading above 50. The Bloomberg consensus estimate called for the index to rise to 61.0. The preliminary Markit U.S. Services PMI Index showed growth (above 50) for the key U.S. sector accelerated more than expected, rising to 63.1 in April from March's 60.4 figure, and compared to forecasts of an increase to 61.5.

Markit noted that U.S. private sector businesses registered a survey record expansion of output during April, as looser COVID-19 restrictions and strong client demand boosted business activity. A steep upturn in manufacturing production occurred despite unprecedented supply chain disruptions, while services activity growth hit a new high. New order growth accelerated with firms noting the strongest upturn on record, backlogs of work rose at the fastest pace since September 2014 amid the surge in demand, and new export orders rose at the fastest pace since composite data series began in 2014. However, the report said that although the rate of inflation eased slightly the rise was the second-fastest on record, with many firms seeking to pass on greater costs to clients.

New home sales (chart) jumped 20.7% month-over-month (m/m) in March to an annual rate of 1,021,000 units, versus forecasts calling for a rate of 885,000 units and compared to February's upwardly revised 846,000-unit level. The median home price ticked 0.8% higher y/y to $330,800. New home inventory fell to a 3.6-months supply at the current sales pace from the 4.4-months level in February. Sales in all regions rose sharply m/m, except for in the West where sales dropped. Sales in the Northeast, Midwest and South were up sharply y/y, while down in the West. New home sales are based on contract signings, offering a timelier read on housing activity compared to the larger contributor of existing home sales, which are based on closings.

Treasuries were lower, as the yield on the 2-year note ticked 1 basis point (bp) higher to 0.16%, while the yields on the 10-year note and the 30-year bond rose 3 bps to 1.57% and 2.25%, respectively.

Bond yields and the U.S. dollar have cooled off as of late from noticeable gains seen in Q1 even with economic data being strong to preserve expectations of robust 2021 growth, and inflation expectations having gained ground. Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, How to Handle a Bond Bear Market, how it can be challenging to handle a bond bear market, a period during which investors drive bond prices down and yields—which move inversely to prices—higher. She points out that the good news is that the worst of this phase of the bond bear market may be over, and you can take steps to help mitigate the impact of increased volatility and higher interest rates.

Europe adds to a weekly decline, Asia mixed

European equities finished lower amid some weakness among the Real Estate, Consumer Staples, Health Care and Energy sectors, which helped to extend a weekly decline in the region. However, stocks came off the worst levels of the day as Information Technology and Materials issues turned to the upside. Concerns about rising COVID-19 cases in parts of the globe have stymied some of the enthusiasm regarding strong economic prosperity in 2021. Moreover, yesterday's reports that the U.S. may be mulling a sizeable boost in capital gains taxes to fund its infrastructure spending plans seemed to dampen conviction. Stocks saw pressure despite another dose of strong economic data and the continued positive start to earnings season. Markit's preliminary April Manufacturing and Services PMIs showed manufacturing growth moved further into solid expansion territory while services sector output unexpectedly improved and escaped contraction territory. Additionally, Markit's U.K. manufacturing and services activity reports showed growth out of each sector for this month accelerated more than expected. In other economic news, U.K. retail sales in March rose much more than anticipated.

Recent economic data and the massive amounts of monetary and fiscal policy relief have underpinned the markets and Schwab's Liz Ann Sonders addresses in her commentary the question of Will Rising Federal Debt Slow Economic Growth?, and Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his article, Stimulus Payback: 2023. The euro gained solid ground on the U.S. dollar and the British pound was only modestly higher against the greenback, while bond yields in the Eurozone and the U.K. were higher.

The U.K. FTSE 100 Index finished little changed, France's CAC-40 Index and Switzerland's Swiss Market Index lost 0.2%, Italy's FTSE MIB Index ticked 0.1% lower, Germany's DAX Index fell 0.3%, and Spain's IBEX 35 Index declined 0.4%.

Stocks in Asia finished mixed in the final session of a choppy week that saw the markets grapple with data that has preserved expectations of strong 2021 economic growth, as well as festering concerns regarding the implications of rising COVID-19 cases in pockets of the world, notably in Japan and India. Preliminary April business activity reports were also sifted through, with Japanese manufacturing growth accelerating, and its services sector output improving but remaining in contraction territory. Moreover, Australia's manufacturing and services sector growth both accelerated solidly for this month. In other economic news, Japan's department store sales rebounded sharply for March.

Japan's Nikkei 225 Index declined 0.6%, with the yen extending a recent rally, while India's S&P BSE Sensex 30 Index traded 0.4% to the downside. However, China's Shanghai Composite Index advanced 0.3% and the Hong Kong Hang Seng Index rose 1.1%. Also, Australia's S&P/ASX 200 Index ticked 0.1% higher and South Korea's Kospi Index gained 0.3%. Schwab's Jeffrey Kleintop notes in his article Bull? Bear? How about a "Bunny" Market?, that there are a variety of clashing factors affecting the stock market this year, including worries over rising interest rates countered by the confidence seen in booming business investment, and robust M&A activity. We expect the bunny market to continue hopping around in the weeks ahead, as it reacts to these factors. Also, Jeff discusses in his latest article, The Next Bubble?, how the specific set of conditions that have historically characterized the start of an investment bubble appear to be forming.

Stocks snap weekly winning streak

U.S stocks ended a three-week winning streak, despite continued global economic data that suggested solid 2021 expansion is coming to fruition and a heating up in Q1 earnings season that has thus far seen revenue and earnings beat rates run high. The optimism of 2021 prosperity has been a key contributor to the equity market's march back to record highs during the three-week rally, along with the cooling off of sharp increases for Treasury yields and the U.S. dollar seen in Q1, and the massive amount of monetary and fiscal policy support. With equities running at record highs, susceptibility to negative headlines was also elevated. Stocks pulled back on the week as the festering persistence of new COVID-19 cases in key pockets of the world conspired with reports that the Biden Administration was mulling doubling capital gains taxes to help fund its infrastructure spending plans. The markets seemed a bit defensive, as weekly gains for the Real Estate and Health Care sectors were more than offset by weakness in Energy, Consumer Discretionary, Communications Services, Information Technology and Financials issues. The U.S. dollar and Treasury yields continued their retracements, while gold was little changed and crude oil prices gave back some of last week's jump.

Although Q1 earnings season will continue to heat up, next week the economic calendar will wake back up and deliver some key data points that could garner some attention. The preliminary March durable goods orders report will get the ball rolling, and be followed by April Consumer Confidence, the first look (of three) at Q1 GDP, jobless claims for the week ended April 24, March personal income and spendingfigures, and the final April University of Michigan Consumer Sentiment Index. However, the headlining event will likely be the midweek monetary policy decision from the Federal Open Market Committee (FOMC). The FOMC will not provide updated economic projections, but the customary press conference from Chairman Jerome Powell is likely to continue to foster the most scrutiny.

Next week's international economic front also has the potential to have an impact on the markets with reports worth noting including: China—industrial profits and the April Manufacturing and Non-Manufacturing PMIs. Japan—Bank of Japan monetary policy decision, industrial production and retail sales. Eurozone—Q1 GDP and April consumer price inflation estimate, along with German unemployment change and April business sentiment.

As noted in our latest Schwab Market Perspective: Springing Forward, the U.S. economy is accelerating quickly, with gross domestic product growth expected to be as high as 8% this year—the fastest pace since 1983. Globally, we've just experienced the sharpest economic "V" in history—a deep recession and rapid recovery within just five quarters. Longer-term bond yields have continued to rise, reflecting the economy’s faster-than-expected recovery from the COVID-19 crisis, as well as growing inflation concerns. However, optimism remains elevated in many measures of sentiment—particularly on the attitudinal side. The hope is that even if sentiment remains stretched, expected stronger earnings growth is kicking in, which could ease valuation pressures. For now, however, pervasive enthusiasm is more of a vulnerability for equities.

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Bulls Fall Short in Attempt to Keep Winning Streak Alive

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