Stocks End Week on a Down Note

U.S. equities finished the final session of July lower, while also posting losses on a weekly basis, as investors mulled a host of items, including the possible implications of the spreading Delta variant, China's recent crackdown on big companies, and a flood of earnings and economic data. As the busiest week of earnings season came to a close, Amazon.com's miss on revenues and softer-than-expected guidance weighed heavily on its shares, as well as the Consumer Discretionary sector and the broader markets. Meanwhile, the Street cheered results from Procter & Gamble even as the company warned of higher commodity cost headwinds, while Dow members Chevron missed revenue forecasts and Caterpillar noted supply chain challenges and higher manufacturing costs. On the economic front, personal income and spending topped estimates and Chicago manufacturing growth surprisingly accelerated, while consumer sentiment was revised higher but still below the prior month's level. Treasuries were higher, applying downside pressure on yields, and the U.S. dollar rose, while crude oil prices saw only modest gains and gold was lower. Overseas, Europe finished in the red after a two-day winning streak amid the continued Delta uncertainty and China's recent crackdown, and markets in Asia also saw losses.

The Dow Jones Industrial Average lost 149 points (0.4%) to 34,935, the S&P 500 Index shed 24 points (0.5%) to 4,395, while the Nasdaq Composite decreased 106 points (0.7%) to 14,673. In heavy volume, 1.1 billion shares were traded on the NYSE and 3.6 billion shares changed hands on the Nasdaq. WTI crude oil moved $0.33 higher to $73.95 per barrel. Elsewhere, the Bloomberg gold spot price traded $13.50 to the downside to $1,814.67 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.3% to 92.14. Markets were lower for the week, as the DJIA and the S&P 500 moved 0.4% lower, and the Nasdaq Composite fell 1.1%.

Amazon.com Inc. (AMZN $3,328) reported Q2 earnings-per-share (EPS) of $15.12, above the $12.28 FactSet estimate, as revenues grew 27.0% year-over-year (y/y) to $113.1 billion, below the Street's forecast of $115.4 billion. AMZN issued Q3 revenue and operating income guidance that came in south of expectations. Shares fell.

Dow member Procter & Gamble Company (PG $142) posted adjusted fiscal Q4 EPS of $1.13, exceeding the expected $1.09, as revenues rose 7.0% y/y to $18.9 billion, north of the estimated $18.4 billion. PG issued current fiscal year earnings and revenue guidance that had midpoints that were slightly above forecasts. PG said its current outlook estimates headwinds from higher commodity costs and freight costs, partially offset by foreign exchange benefits. Separately, the company announced that Vice Chairman and Chief Operating Officer Jon Moeller will succeed David Taylor as the company's President and Chief Executive Officer effective November 1. Shares gained ground.

Dow component Chevron Corporation (CVX $102) announced adjusted Q2 earnings of $1.71 per share, topping the forecasted $1.59, with revenues more than doubling y/y to $36.1 billion, compared to the expected $36.3 billion. The company said its Q2 earnings were strong, reflecting improved market conditions, combined with transformation benefits and merger synergies, with its cash flow the highest in two years due to solid operational and financial performance and lower capital spending. CVX noted that it will resume share repurchases in Q3 at an expected rate of $2-3 billion per year. Shares traded lower.

Dow member Caterpillar Inc. (CAT $207) reported adjusted Q2 EPS of $2.60, north of the anticipated $2.41, as revenues rose 29.0% y/y to $12.9 billion, topping the forecasted $12.5 billion. The company noted higher sales volume driven by higher end-user demand for equipment and services and the impact from changes in dealer inventories after they lowered inventories more during Q2 2020 than during Q2 2021. Looking ahead, the company said it expects strong volume growth in Q3 while managing supply chain challenges, and within machines it expects price to offset higher manufacturing costs for 2021. Shares were lower.

For a look at our rationale for our recent downgrade of the Energy sector, check out head of the Schwab Center for Financial Research's Market Analysis Group, David Kastner's, CFA, Schwab Sector Views: Drilling Down on Energy.

As the busiest week for earnings season comes to a close, Schwab's Chief Investment Strategist Liz Ann Sonders delivers her latest article, One Step Closer … to Peak Earnings Growth?. She points out that while earnings have already surprised to the upside in the second quarter, the magnitude of strength has been expected. Looking ahead, Liz Ann notes, earnings growth rates will likely continue to cool, as comparisons to the prior year inevitably become more difficult. She adds that as we have continued to point out, investors should focus not just on the earnings growth rate; but also what companies are saying with respect to inflationary pressures, profit margins, and forward guidance.

Find all our market commentary as the markets remain choppy, including a discussion by Schwab experts on How to Make Rational Buy and Sell Decisions, on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

Personal income and spending top forecasts, consumer sentiment revised up but still lower m/m

Personal income (chart) rose 0.1% month-over-month (m/m) in June, versus the Bloomberg forecast of a 0.3% decrease, following May's downwardly-revised 2.2% drop. Personal spending gained 1.0%, north of estimates of a 0.7% gain and compared to the prior month's negatively-adjusted 0.1% dip. The June savings rate as a percentage of disposable income was 9.4%.

The PCE Deflator increased 0.5% m/m, below expectations of a 0.6% gain and matching May's upwardly-adjusted increase. Compared to last year, the deflator was 4.0% higher, in line with estimates and matching May's upwardly-adjusted gain. Excluding food and energy, the PCE Core Index rose 0.4% m/m, south of expectations of a 0.6% increase and versus May's unadjusted 0.5% rise. The index was 3.5% higher y/y, below estimates of a 3.7% increase and above May's unadjusted 3.4% gain.

The July final University of Michigan Consumer Sentiment Index (chart) was revised higher to 81.2, versus expectations to be unrevised at the preliminary reading of 80.8. The upward revision came as an unchanged reading on the current conditions component of the survey was met with an upward adjustment to the expectations portion. However, the overall index was lower versus June's 85.5 level, as sentiment regarding both expectations and current conditions fell. The 1-year inflation forecast came in at 4.7%, down from the preliminary reading of 4.8%, but above June's 4.2% rate, and the 5-10 year inflation forecast also dipped to 2.8% from the 2.9% level in the initial estimate and matching the prior month's forecast.

The Q2 Employment Cost Index increased 0.7% quarter-over-quarter (q/q), below estimates calling for it to match Q1's unadjusted 0.9% rise.

The Chicago PMI unexpectedly improved, moving further into a level depicting expansion (a reading above 50). The index rose to 73.4 in July from June's 66.1 reading, versus estimates calling for a decrease to 64.2. The surprising increase back above 70 came as growth in new orders, order backlogs and production all accelerated, and the contraction in employment decelerated, though inflation pressures remained as prices paid slowed but maintained an elevated rate.

Treasuries were higher amid some choppiness in the wake of this week's Fed monetary policy decision that Schwab's Liz Ann Sonders discusses in her latest commentary, Work in Progress: Fed Stands Pat. She notes that the Fed left its interest rate and balance sheet policy unchanged but opened the door a bit more to tapering its bond purchases.

The yield on the 2-year note dipped 2 basis points (bps) to 0.19%, the yield on the 10-year note fell 4 bps to 1.23%, and the 30-year bond rate decreased 3 bps to 1.89%.

Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her latest article, If the Economy's So Strong, Why Are Bond Yields Falling?, how the steep drop in yields has defied conventional wisdom. Kathy notes that it looks to us like the market moves reflect the view that the peaks in growth and inflation in this cycle have passed, and the prospect of tighter policy by the Fed would dampen the outlook for the economy. She adds that while we agree with that assessment longer term, we believe yields are now too low relative to the economic outlook and are likely to rebound later this year.

Europe concludes week mostly lower, Asia also loses ground

European equities finished mostly lower, cooling off from a two-day gain, amid softness in the Energy and Financials sectors, along with Materials and Information Technology issues. The markets remained uncertain regarding the implications of the Delta coronavirus variant and the recent crackdown on big business by China. The markets also digested a host of Q2 GDP reports that showed growth in France, Italy and Spain came in stronger than expected, but German expansion was smaller than anticipated. As such, Eurozone Q2 GDP growth exceeded forecasts. The euro and British pound were lower versus the U.S. dollar and bond yields in the Eurozone and the U.K. were little changed.

Amid the concerns regarding the implications of the Delta coronavirus variant, Schwab Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Where To Invest Now: COVID And Correlation, discussing how COVID-19 resurgences appear to be the primary driver of moves across many markets this year. Jeff adds that until the COVID-19 case count gets back under control, the yen may strengthen, the U.K. yield curve may flatten, and defensive lockdown-era leaders in the stock market may continue to outperform. Amid this uncertainty, Jeff says the key is diversification since many different types of stocks are making new all-time highs, but they are not moving in sync with each other.

The U.K. FTSE 100 Index was down 0.7%, France's CAC-40 Index declined 0.3%, Germany's DAX Index and Italy's FTSE MIB Index lost 0.6%, and Spain's IBEX 35 Index fell 1.3%, while Switzerland's Swiss Market Index advanced 0.3%.

Stocks in Asia finished lower in the final session of the week with yesterday's rebound from a weekly drop proving short-lived. The weekly drawdown came amid the intensified crackdown by China on big business, notably the tech, education and ecommerce industries. With markets choppy, Schwab's Managing Director of Trading and Derivatives Randy Frederick offers his article, Breaking Bad Trade Behaviors. Randy stresses to be on the lookout for those times when emotions can get the best of us, offering guidance on how to navigate four potentially fraught trading situations. He points out that if you have trouble distancing your emotions from your trading decisions, it’s never a bad idea to slow down or even take a break. "Cooler heads usually prevail, and trading is no exception," Randy concludes. In economic news, Japan's and South Korea's industrial production reports both showed growth was stronger than expected in June, while Japan's retail sales for last month rose by a smaller amount than anticipated and Hong Kong's y/y Q2 GDP growth missed forecasts.

Japan's Nikkei 225 Index declined 1.8% with the yen remaining firm, and China's Shanghai Composite Index decreased 0.4%. The Hong Kong Hang Seng Index traded 1.4% lower and South Korea's Kospi Index declined 1.2%. Australia's S&P/ASX 200 Index was down 0.3%, and India's BSE Sensex 30 Index dipped 0.1%.

Stocks slip in final week of July as heavyweight sectors slide

U.S. stocks dipped to close out July as the markets were bogged down by the heavyweight Consumer Discretionary, Information Technology, and Communications Services sectors as the Street digested earnings reports from key mega-cap growth companies in these groups. These sectors had run up leading into the busiest week of earnings season, which may have fostered the mixed reactions to their results, but Dow member Apple Inc's (AAPL $146) warning of supply constraints affecting sales growth and Amazon.com's revenue miss and softer-than-expected guidance likely exacerbated concerns about peak growth rates. These two companies have a sizeable impact not only on their respective sectors but also on the broader markets as they have a combined market capitalization north of $4.0 trillion. However, Google parent Alphabet Inc's (GOOGL $2,695) results were cheered by the Street and earnings season thus far has been robust, with profit and revenue beat rates above 80% and tracking above historical averages and y/y growth rates are on pace to top extremely lofty expectations and hit the highest level since Q4 2009.

Weekly losses were held in check as lesser-weight value/cyclical sectors posted green figures, led by Materials and Energy issues. Also hampering conviction was the festering Delta variant uncertainty and China's ramped-up crackdown on major industries, notably tech and education. Along with the grappling with peak earnings growth uncertainty, the economic calendar offered a mixed view to keep the discussion alive regarding if the economic growth rate has hit its pinnacle. New home sales unexpectedly fell, durable goods orders missed estimates, and Q2 GDP growth of 6.5% on a quarter-over-quarter annualized rate came in well below economists' 8.4% forecast, as inventory investment bogged down output. However, Consumer Confidencesurprisingly improved to pre-pandemic levels, personal income and spending topped projections, and regional manufacturing expansion continued to mostly surprise to the upside.

Given this backdrop, the Federal Reserve delivered its monetary policy decision this week, holding its stance steady as it remains laser focused on accommodating the labor market recovery but signaling further progression of discussions on tapering its monthly asset purchases. Treasuries remained in demand and continued to dampen yields, the U.S. dollar declined, gold prices rose, and crude oil prices posted a second-straight weekly gain.

This sets the stage for next week that will see Q2 earnings season continue to deliver a plethora of reports, joined by a fully-loaded economic docket. Markit and ISM will get the ball rolling by releasing their July Manufacturing PMIs, which will be followed by their respective Services PMIs later in the week. The labor front will also continue to be in focus as ADP will report on private sector employment and jobless claimsfor the week ended July 31 will hit the tape. However, the headliner of the calendar will likely be Friday's July nonfarm payroll report, given the Fed's prioritization of bringing down the still elevated level of the unemployed and as some key industries have been hampered by severe labor shortage issues.

Next week's international economic calendar may have a shot at competing for market attention, courtesy of monetary policy decisions out of the U.K., Australia and India, along with Manufacturing and Services PMIs out of China, Japan, the Eurozone and the U.K. Other reports that could garner attention include: Australia—retail sales. Japan—household spending. Eurozone—retail sales, as well as German factory orders and industrial production.

With the markets likely to remain choppy, check out our article, How Traders Can Take Advantage of Volatile Markets, in which we discuss how the good news is that as volatility increases, the potential to make more money quickly also increases, but the bad news is that higher volatility also means higher risk. When volatility spikes, it may be possible to generate an above-average profit, but you also run the risk of losing a larger amount of capital in a relatively shorter period of time. We offer four steps to consider, which implemented with a disciplined approach can help you learn to manage volatility for your benefit—while helping you minimize risks.

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 End Week on a Down Note

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