Stocks Close Lower, Wrapping Up a Busy Week of Data

U.S. equities closed lower on the day and mostly lower for the week as markets wrestled with a week full of high-profile earnings and economic reports. Most sectors were lower as stocks within the Energy sector bore the brunt of today’s downdraft, while issues in the Real Estate and Consumer Discretionary sectors offered some of the few bright spots. The earnings calendar remained a major focus, as Amazon.com trounced estimates and Chevron swung a profit, while investors appeared unimpressed with Twitter’s earnings results and guidance. In economic news, March personal income soared with the aid of recent stimulus checks, while Q1 employment costs rose, consumer sentiment was revised higher, and manufacturing activity in the Chicago region jumped to its highest level in over 37 years. Treasuries were higher with rates modestly coming down and the U.S. dollar was sharply higher, while gold and crude oil prices fell. Overseas, Asia finished out the week lower following some disappointing Chinese data, while stocks in Europe lost steam late in the day to finish mostly lower amid a number of reports on the economic and earnings fronts.

The Dow Jones Industrial Average fell 186 points (0.5%) to 33,875, the S&P 500 Index decreased 30 points (0.7%) to 4,181, and the Nasdaq Composite declined 120 points (0.9%) to 13,963. In heavy volume, 1.2 billion shares were traded on the NYSE and 4.7 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.43 to $63.58 per barrel. Elsewhere, the Bloomberg gold spot price was $4.20 lower at $1,767.97 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.8% to 91.30. Markets were mostly lower for the week, as the DJIA moved 0.5% to the downside, the S&P 500 was little changed, and the Nasdaq Composite declined 0.4%.

Amazon.com Inc. (AMZN $3,467) reported Q1 earnings-per-share (EPS) of $15.79, far exceeding the $9.54 FactSet estimate. Revenues jumped 43.8% year-over-year (y/y) to $108.5 billion, above the Street's $104.5 billion forecast, as the online retailer continued to benefit from the pandemic-fueled surge of shopping over the internet. Looking ahead, AMZN said it sees the momentum continuing in Q2, with sales expected to be in a range of $110 billion to $116 billion, and operating income of between $4.5 billion and $8.0 billion, both metrics well above forecasts. AMZN traded lower.

Twitter Inc. (TWTR $55) posted a Q1 profit of $0.16 per share, adjusted for stock-based compensation and other items, compared to the $0.14 per share FactSet estimate, on a 28% y/y increase in revenues to $1.04 billion that mostly matched forecasts. Monetizable daily active users (mDAUs) grew by 7 million from the Q4 to 199 million, but fell short of the Street's 200 million expectation. However, the social media company lowered its guidance, saying it sees Q2 revenue of between $980 million to $1.08 billion, with the Street's median forecast at $1.05 billion. Shares fell over 10%.

Chevron Corporation (CVX $103) swung to a profit for the Q1, posting an adjusted gain of $0.90 per share, a penny above the FactSet estimate, as revenues rose 1.7% y/y to $32.0 billion, mostly in line with forecasts. Including pension settlement costs and legal reserves totaling $351 million, Q1 EPS would have been $0.72. In a statement, the oil company's CEO Mike Wirth said, "Earnings strengthened primarily due to higher oil prices as the economy recovers." Upstream operation—exploration and production—nearly tripled from year-ago levels, while downstream—refining—came off a loss last year to show a marked gain in operations. Shares were lower.

Q1 earnings season hit a crescendo yesterday and per data compiled by Bloomberg, with 300 of the S&P 500 companies that have reported thus far, roughly 71% have topped revenue expectations, while about 87% have bested earnings estimates. At this point, sales growth is on track to be up 11.5% y/y and profit expansion is on pace to be approximately 52% 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 at our Market Insights page on www.schwab.com, and you can follow us on Twitter @SchwabResearch.

Personal income jumps, consumer sentiment revised higher, regional manufacturing soars

Personal income (chart) jumped 21.1% month-over-month (m/m) in March, versus the Bloomberg forecast of a 20.1% increase, and following February's upwardly revised 7.0% shortfall. Personal spending rose 4.2%, versus estimates of a 4.1% rise and compared to the prior month's unadjusted 1.0% decline. The March savings rate as a percentage of disposable income was 27.6%.

The PCE Deflator increased 0.5% m/m, matching expectations, and compared to February's unadjusted 0.2% gain. Compared to last year, the deflator was 2.3% higher, in line with estimates and above February's downwardly adjusted 1.5% advance. Excluding food and energy, the PCE Core Index moved 0.4% higher m/m, above expectations for a 0.3% gain and north of February's unrevised 0.1% increase. The index was 1.8% higher y/y, matching estimates and compared to February's unadjusted 1.4% increase.

The final University of Michigan Consumer Sentiment Index for April (chart) was revised higher than expected to 88.3, versus expectations to be adjusted slightly upward to 87.5 from the preliminary reading of 86.5. The upward revision came as the expectations component of the survey was revised favorably and the current conditions component remained at its preliminary level, while both were solidly higher m/m. The overall index was up versus March's 84.9 level and posted the strongest figure since March 2020. The 1-year inflation forecast dipped to 3.4% from March's 3.7% rate, and the 5-10 year inflation forecast remained at the prior month's 2.7% forecast.

Finally, the Chicago PMI accelerated more than expected to move further into expansion territory (a reading above 50) for April. The index jumped to 72.1 from March's 66.3 level—the highest level since December 1983—versus estimates calling for a decline to 65.0. The higher-than-expected expansion for the index came as new orders, prices paid, production and employment grew at faster paces, while inventories reversed direction, signaling contraction.

The Q1 Employment Cost Index (chart) increased 0.9% quarter-over-quarter (q/q), exceeding estimates calling for it to match Q4's unadjusted 0.7% rise.

Treasuries were higher, with the yields on the 2-year note and 30-year bond both flat at 0.16% and 2.30%, respectively, while the yield on the 10-year note declined 1 basis point to 1.63%.

Bond yields have crept higher after cooling from the sizable gains seen in Q1, while the U.S. dollar is jumping today, but continues to be well below the peak reached at the end of March, 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.

Asia and Europe finish lower with spotlight on busy economic calendar

European equities lost steam late in the day to finish mostly lower, as investors sifted through a deluge of economic data in the region, while also keeping an eye on a still-busy earnings season. Consumer spending in France cooled, but at a slower-than-expected pace and consumer and wholesale prices were hotter than forecasts, a preliminary read on Q1 GDP out of Italy improved quarter-over-quarter (q/q), but continued to show contraction, while output out of Spain and Germany worsened q/q. On the earnings front, U.K. investment bank Barclays PLC (BCS $10), French banking conglomerate BNP Paribas (BNPQY $32) posted positive quarterly results, and British pharmaceutical giant AstraZeneca PLC (AZN $54) reported better-than-expected earnings, saying its COVID-19 vaccine contributed $275 million to sales, and it offered an upbeat outlook. The euro and the British pound lost ground versus the U.S. dollar. Bond yields in the Eurozone were mixed, while rates in the U.K. were lower.

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 U.K. FTSE 100 Index was up 0.1%, while Germany's DAX Index and Spain's IBEX 35 Index were 0.1% lower, Switzerland's Swiss Market Index and France's CAC-40 Index lost 0.5%, while Italy's FTSE MIB Index traded 0.6% lower.

Stocks in Asia finished out the week lower, despite a positive session out of the U.S. yesterday, as investors turned a bit cautious on the heels of some softer-than-expected economic data out of China. The Asian nation's official manufacturing PMI index showed growth decelerated more than expectations, as did activity out of the services sector, while manufacturing data reported by Caixin showed a modest increase. China's Shanghai Composite Index fell 0.8% and the Hong Kong Hang Seng Index tumbled 2.0%. The Nikkei 225 Index lost 0.8%, returning to action following yesterday's holiday, and despite a slew of positive economic reports in the nation that showed better-than-expected industrial production and manufacturing activity, lower unemployment, and cooler consumer prices out of Tokyo. Meanwhile, Australia's S&P/ASX 200 Index and South Korea's Kospi Index both decreased 0.8%, with the former seeing pressure from energy and financials, while the latter posted a decline in March industrial production. India's S&P BSE Sensex 30 Index fell 2.0%, paring a string of gains seen this week.

For more insight into international stocks and events, see Schwab's Jeffrey Kleintop's latest article, What’s Working? Two Ideas For Investors, where he discusses two investment themes that have been rewarding investors with outperformance: companies in the defense sector and those participating in share buybacks. Also, in his article, The Next Bubble?, Jeff notes how the specific set of conditions that have historically characterized the start of an investment bubble appear to be forming.

Stocks unable to get back to the positive column

U.S. stocks looked to get back on the plus side on a weekly basis amid a busy economic calendar and the pinnacle of Q1 earnings season. Optimism was buoyed by 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. However, stocks pulled back to finish lower for the week, as the festering persistence of new COVID-19 cases in key pockets of the world continued to hamper conviction, and after the conclusion of the Fed's monetary policy meeting offered little new information. A slew of earnings reports hit the tape, with several Dow components posting upbeat figures, including 3M Company (MMM $197), Caterpillar Inc. (CAT $226) and McDonald's Corporation (MCD $235), while results from tech heavyweights Apple Inc. (AAPL $133), Microsoft Corporation (MSFT $251), Google parent Alphabet (GOOGL $2,356) and Amazon.com far exceeded forecasts.

On the economic front, Consumer Confidence rose and consumer sentiment as measured by the University of Michigan was revised upward, while personal income and spending jumped, and regional manufacturing activity continued to impress with the Chicago region hitting a high not seen since late-1983. The Communication Services, Energy and Financials sectors led the way for the week, while Health Care and Utilities lagged. The U.S. dollar remained below its peak reached in late March, Treasury yields continued to creep higher after cooling from the spike seen in the Q1, while gold was little changed, and crude oil prices saw modest gains.

While Q1 earnings season is on the downhill, it will remain robust and remain front and center next week. Meanwhile, the economic calendar will deliver some key data points that is sure to garner some attention. Manufacturing and Services PMIs from both the Institute for Supply Management and Markit are slated for release, as well as factory orders, nonfarm productivity and unit labor costs for Q1, and MBA Mortgage Applications. However, the labor front will likely grab the lion's share of the focus, with weekly initial jobless claims for the week ended May 1 and the ADP Employment Change on deck, but the headlining event will probably be the April labor report.

Next week's international economic front also has the potential to have an impact on the markets with reports worth noting including the Manufacturing and Services PMIs from across the globe, as well as: China—trade data. Australia—the Reserve Bank of Australia monetary policy decision. Eurozone—retail sales, along with German industrial production, retail sales and factory orders. U.K.—the Bank of England monetary policy meeting.

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.

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 Close Lower, Wrapping Up a Busy Week of Data

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