Wild Week Comes to Close with Bulls in Charge

U.S. equities finished higher to cap off a wild week, rebounding decisively from Monday's malaise, while posting the fourth weekly gain in five and notching record highs along the way. The resiliency came after concerns about the global spread of the Delta coronavirus variant and uncertainty regarding if we have reached peak earnings and economic growth rates led to the early week selloff. Q2 earnings season remained in high gear, with positive results from Dow member American Express and Twitter lifting their shares, while Dow members Intel and Honeywell International, along with Boston Beer Company, all fell on the heels of their reports. Investors also sifted through a slew of mixed July global manufacturing and services sector reports, including domestic reads that showed manufacturing growth surprisingly accelerated but services sector expansion decelerated more than expected. Treasuries were mixed after seeing some pressure this week leading to a rebound in yields, and the U.S. dollar ticked higher, while gold lost ground and crude oil prices saw only modest gains. Overseas, markets in Europe were broadly higher, adding to the week's sharp rebound, while stocks in Asia were mixed amid lighter-than-usual volume with Japan again closed for a holiday.

The Dow Jones Industrial Average rose 238 points (0.7%) to 35,062, the S&P 500 Index advanced 44 points (1.0%) to 4,412, while the Nasdaq Composite increased 152 points (1.0%) to 14,837. In moderate volume, 813 million shares were traded on the NYSE and 3.9 billion shares changed hands on the Nasdaq. WTI crude oil ticked $0.16 higher to $72.07 per barrel. Elsewhere, the gold spot price decreased $4.99 to $1,801.93 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.1% to 92.88. Markets were higher for the week, as the DJIA gained 1.1%, the S&P 500 moved 2.0% higher, and the Nasdaq Composite jumped 2.8%.

Dow member American Express Company (AXP $173) reported Q2 earnings-per-share (EPS) of $2.80, including $866 million in credit reserve releases—driven by its strong credit performance and continued improvements in the macroeconomic outlook—and compared to the $1.63 FactSet estimate. Revenues rose 33.0% year-over-year (y/y) to $10.2 billion, exceeding the Street's forecast of $9.6 billion.

The company noted that demand for its premium, fee-based products continued to be robust, while it saw card member spending accelerate from the prior quarter and exceed pre-pandemic levels in June, with the largest portion of this growth coming from Millennial, Gen Z, and small business customers. AXP said it expects EPS to be within the high end of expectations as it is increasingly optimistic that the momentum it has generated will continue given the strength it sees in its core business, particularly in the U.S., even as the pace of the recovery remains uneven in different regions around the world. Shares were nicely higher.

Dow component Intel Corporation (INTC $53) posted adjusted Q2 EPS of $1.28, above the expected $1.07, with revenues rising 2.0% y/y to $18.5 billion, exceeding the forecasted $17.8 billion. The chipmaker said the digitization of everything continues to accelerate, creating a vast growth opportunity for it and its customers across core and emerging business areas. INTC raised its full-year earnings and revenue guidance. Shares fell as the company lowered its Q3 margin outlook and warned that the chip shortage could drag into 2023.

Dow member Honeywell International Inc. (HON $229) announced adjusted Q2 profits of $2.02 per share, as revenues grew 18.0% y/y to $8.8 billion, topping the projected $8.6 billion. The company noted sales growth and margin expansion in all four segments, led by double-digit growth in performance materials and technologies, building technologies, and safety and productivity solutions. HON increased its full-year EPS and revenue outlooks. Shares were lower.

Twitter Inc. (TWTR $72) reported adjusted Q2 EPS of $0.20, compared to the forecasted $0.07, with revenues rising 74.0% y/y to $1.2 billion, topping the anticipated $1.1 billion. TWTR said it delivered better-than-expected performance across all major products and geographies while growing its audience. The company issued Q3 revenue guidance that was above forecasts, noting that it continues to expect total revenue to grow faster than expenses in 2021, assuming the global pandemic continues to improve, but how much faster will depend on various factors, including its execution on its direct response roadmap and macroeconomic factors. Shares gained ground.

Boston Beer Company Inc. (SAM $701) posted Q2 EPS of $4.75, well below the Street's forecast of $6.60, with revenues rising 33.3% y/y to $603 million, missing the projected $658 million. The company said during Q2 it saw significant growth in the on-premise channel and re-opened all its retail locations as most COVID-19 restrictions have been lifted. However, it noted that 24% depletions growth for Q2 decelerated from its Q1 growth of 48% and was below its expectations, as the hard seltzer category and overall beer industry were softer than it had anticipated. SAM lowered its full-year earnings guidance. Shares fell over 25%.

Q2 earnings season continued to gain steam, and although early, of the 118 S&P 500 companies that have reported thus far, roughly 81% have topped revenue forecasts, and approximately 87% have bested earnings estimates, per data compiled by Bloomberg. Compared to the same period last year, sales are tracking to be up nearly 18.0% and earnings are so far about 119% higher.

Schwab's Chief Investment Strategist Liz Ann Sonders delivers her latest article, Whole Lotta Love: Sentiment's Potential Warning, noting how investor sentiment has remained quite elevated over the course of the market’s 16-month advance. She adds that while we aren't seeing the broad-based euphoria that preceded the coronavirus crash in early 2020, several metrics underscore that investors are very optimistic in both their attitudes and positioning. Liz Ann points out that that has been the case for a considerable portion of the current bull run, and throughout that time, we would argue that strong breadth has shielded the market and prevented any choppiness from transforming into something more sinister. However, she notes that some short-term breadth metrics have started to weaken but, thus far, longer-term breadth is still healthy, with more than 90% of stocks in the S&P 500 above their 200-day moving average.

She concludes by saying, "Aside from wholly unpredictable virus-related factors, some negative catalysts could emerge in the form of hits to profit margins, a dialing back in future earnings estimates, and/or a faster-than-expected maturation of the business cycle. As we've continued to argue, the best preparation will continue to be discipline around diversification—not just related to sectors, but factors as well—and periodic rebalancing."

Find all our market commentary amid the recent volatility, including Schwab's Managing Director of Trading and Derivatives Randy Frederick's article, Breaking Bad Trade Behaviors, on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

July manufacturing growth surprisingly accelerates, but services declines more than expected

The preliminary Markit U.S. Manufacturing PMI Index for July unexpectedly improved to 63.1 from June's unrevised 62.1 figure, moving further into expansion territory as denoted by a reading above 50. The Bloomberg consensus estimate called for the index to dip to 62.0. The preliminary Markit U.S. Services PMI Index showed growth (above 50) for the key U.S. sector decelerated more than expected, declining to 59.8 from June's 64.6 figure, and compared to forecasts of a dip to 64.5.

Markit said combining both manufacturing and services sector activity data, the composite index showed U.S. private sector companies reported a further substantial expansion in business activity during July. That said, the rate of growth eased for the second month running to the softest since March, as firms continued to report widespread capacity constraints.

Treasuries were mixed after seeing some pressure as of late to allow yields to claw back from an early-week drop. The yield on the 2-year note dipped 1 basis point (bp) to 0.19%, while the yields on the 10-year note and the 30-year bond rose 1 bp to 1.29% and 1.92%, respectively.

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 closes out the week with broad-based gains following data, Asia mixed

European equities finished broadly higher, extending the week's solid rebound from a noticeable selloff on Monday that was fueled by the persistent spreading of the Delta coronavirus variant. The markets digested a host of preliminary July manufacturing and services sector data reported by Markit. Strong growth out of Germany led to the Markit Eurozone Composite PMI—a gauge of manufacturing and services sector activity—to improve to 60.6 from June's 59.5 level, with a reading north of 50 depicting expansion. Moreover, Markit's U.K. Composite PMI slowed to 57.7 from the prior month's 62.2 reading and compared to the forecasted dip to 61.5. However, the index remained comfortably north of the demarcation line of 50, and a separate report showed U.K. retail sales came in stronger than anticipated for last month. The widespread gains in the region were led by the Consumer Discretionary and Information Technology sectors, along with Financials, Materials, Industrials and Energy issues. The euro and the British pound dipped versus the U.S. dollar. Bond yields in the Eurozone were mixed and rates in the U.K. were higher.

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 up 0.9%, France's CAC-40 Index gained 1.4%, Germany's DAX Index advanced 1.0%, Spain's IBEX 35 Index increased 1.1%, while Switzerland's Swiss Market Index and Italy's FTSE MIB Index traded 1.3% higher.

Stocks in Asia finished mixed to close out a volatile week that saw the global markets rebound from an early-week tumble amid concerns regarding the global economic implications of the persistent spreading of the Delta coronavirus variant. However, volume remained lighter than usual with Japanese markets continuing to be closed for a holiday. The market choppiness has come amid lingering uncertainty as to whether we have reached peak earnings/economic growth rates, as well as continued grappling with the path forward for global monetary policies. Bond yields have softened as of late and the U.S. dollar has rallied, while crude oil prices have recovered from some heavy early week pressure. Chinese and Hong Kong markets saw some pressure amid festering uneasiness as China reportedly continues its regulatory crackdown on certain industries, notably the tech sector. In economic news, Australia's preliminary July manufacturing growth slowed but remained comfortably in expansion territory, but its services sector output for this month slowed sharply and moved into contraction territory. Schwab's Kathy Jones and Senior Fixed Income Research Analyst, Christina Shaffer discuss in their article, What’s Next for Emerging-Market Bonds?, noting that the landscape is changing for emerging market bonds, as China pushes harder on the brakes for new credit growth and a Fed policy change could potentially be a seismic event.

China's Shanghai Composite Index declined 0.7%, and the Hong Kong Hang Seng Index fell 1.5%. South Korea's Kospi Index and Australia's S&P/ASX 200 Index both ticked 0.1% higher, while India's BSE Sensex 30 Index advanced 0.3%.

Stocks overcome Monday selloff and finish week back near record highs

U.S. stocks began the week under heavy pressure as the weakness that ramped up late last week jumped the weekend leading to a sharp drawdown on Monday. Growth concerns appeared to persist and Treasuries rallied to apply noticeable pressure on bond yields, while the uneasiness seemed to be amplified by the persistent spreading of the Delta coronavirus variant. However, in the wake of the washout, the equity markets staged a sharp snapback and the bulls coasted out a four-day winning streak to take the major indexes back to record high territory. Earnings season shifted into a higher gear to offer a broader read on the health of corporate bottom lines, and mostly strong results, boosted guidance and upbeat commentary from management teams seem to provide the bulls the resiliency sustenance. The bounce back endured even as the economic calendar offered mixed data points, with June housing starts stronger than expected to alleviate some housing supply concerns but building permits unexpectedly fell. Moreover, jobless claims for the week ended July 17 surprisingly accelerated, existing home sales for last month came in modestly below forecasts, and July services sector growth decelerated more than expected. However, the Leading Index rose for a fourth-straight month in June and July manufacturing growth unexpectedly accelerated.

As such, growth sectors—Consumer Discretionary, Communications Services and Information Technology—were the week's leading gainers, while the defensively-natured sectors—Real Estate and Utilities—underperformed, along with Energy issues. The Treasury yield curve finished near where it left off last week but the moves during this week were far from uneventful, as Monday's sharp drop in rates was followed by a pullback in Treasury prices to foster a decisive rebound in yields. The U.S. Dollar Index posted a second week of gains and gold relinquished last week's advance. Crude oil prices nudged higher after battling back from noticeable early-week pressure that came as the growth concerns were accompanied by OPEC and its allies, known as OPEC+, reaching an elusive deal to increase oil production in the coming months.

Next week, the markets will have a host of data to contend with as Q2 earnings season will be turbo-charged by one of the busiest weeks of the period and will bring results from some of the heaviest market players. Results from Dow members Apple Inc. (AAPL $148) and Microsoft Corporation (MSFT $290) will be joined by reports out of Amazon.com Inc. (AMZN $3,657), Google parent Alphabet Inc. (GOOGL $2,60), and Tesla Inc. (TSLA $643). These five stocks have a combined market capitalization of close to $9.0 trillion. Meanwhile, midweek, the Fed will jump back into the picture as the Federal Open Market Committee (FOMC) will deliver its monetary policy decision on Wednesday. The decision will come as the markets remain hyper-sensitive to trying to determine the timing of when the FOMC will begin to rein in its extremely-accommodative policy by first tapering its monthly asset purchases. The announcement will not be accompanied by updated economic projections but the customary press conference shortly after by FOMC Chairman Jerome Powell could garner heavy scrutiny. The economic docket next week will also bring the first read (of three) on Q2 GDP, July Consumer Confidence, June personal income and spending figures, the July Chicago PMI, June new home sales, and the final University of Michigan Consumer Sentiment Index for July.

Next week's international economic calendar also has the potential to garner some attention with reports worth noting being; China—Manufacturing and Non-Manufacturing PMIs, and industrial profits. Japan—Manufacturing and Services PMIs, industrial production, and retail sales. Eurozone—Q2 GDP, consumer price inflation statistics, and economic confidence, along with German business confidence and unemployment change.

Amid the ramped-up volatility that has seen the overall major indexes rally back to record highs but pockets of noticeable weakness underneath the surface, Schwab's Managing Director of Trading and Derivatives Randy Frederick offers his article, Breaking Bad Trade Behaviors. Randy stresses to not become a robot but rather to be on the lookout for those times when emotions can get the best of us. He offers guidance on how to navigate four potentially fraught trading situations—You're holding on to a loser, You've had a string of losses, the market is tanking, and the market is soaring. 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.

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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Wild Week Comes to Close with Bulls in Charge

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