Dow Rallies on Earnings
U.S. stocks rebounded from yesterday's decline with the Dow rallying on upbeat earnings releases from Caterpillar, 3M and McDonald's, while domestic business activity reports showed growth in output was stronger than expected. Treasury yields gained ground and the U.S. dollar overcame early losses to finish mostly flat, while gold was lower and crude oil prices traded higher. In other earnings news, GM exceeded quarterly projections and Eli Lilly topped consensus revenue forecasts.
The Dow Jones Industrial Average (DJIA) rallied 168 points (0.7%) to 23,442, the S&P 500 Index increased 4 points (0.2%) to 2,569, and the Nasdaq Composite gained 12 points (0.2%) to 6,598. In moderate volume, 777 million shares were traded on the NYSE and 1.8 billion shares changed hands on the NASDAQ. WTI crude oil traded $0.57 higher to $52.47 per barrel and wholesale gasoline increased $0.03 to $1.67 per gallon. Elsewhere, the Bloomberg gold spot price declined $4.66 lower to $1,277.61 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 93.95.
Dow member Caterpillar Inc. (NYSE:CAT $138) reported Q3 earnings-per-share (EPS) of $1.77, or $1.95 ex-items, versus the $1.27 FactSet estimate, as revenues jumped 23.9% year-over-year (y/y) to $11.4 billion, compared to the projected $10.7 billion. The heavy equipment maker said it continues to see strength in a number of industries and regions, including construction in China, on-shore oil and gas in North America, and increased capital investments by mining companies. As such, the company boosted its full-year outlook. Shares rallied.
Dow component McDonald's Corp. (NYSE:MCD $164) posted Q3 earnings of $2.32 per share, or $1.76 ex-items, versus the estimated $1.76, with revenues decreasing 10.0% y/y to $5.8 billion, due to the impact of its strategic refranchising initiative, roughly in line with expectations. Q3 same-store sales grew 6.0% y/y, compared to the forecasted 4.6% gain. The company said its positive same-store sales and guest counts across all of its operating segments builds upon its strong first half of 2017. MCD was higher.
Dow member United Technologies Corp. (NYSE:UTX $120) achieved Q3 EPS of $1.67, or $1.73 ex-items, compared to the expected $1.69, as revenues rose 5.0% y/y to $15.1 billion, topping the forecasted $15.0 billion. UTX raised its full-year EPS outlook and the low end of its revenue guidance. Shares closed lower.
Dow component 3M Co. (NYSE:MMM $235) reported Q3 profits of $2.33 per share, versus the projected $2.21, with revenues rising 6.0% y/y to $8.2 billion, above the anticipated $7.9 billion. The company said it saw an even more robust performance in Q3 coming off a strong first half, with organic growth positive across all business groups and geographic areas. MMM raised its full-year outlook and shares finished nicely higher.
General Motors Co. (NYSE:GM $46) posted Q3 EPS of $1.32, well above the expected $1.12, as revenues declined 13.5% y/y to $33.6 billion, above the forecasted $32.2 billion. The automaker said it delivered solid results even with planned lower Q3 production in North America, as it was profitable in all business segments for the first time since Q4 2014. GM issued full-year earnings guidance that exceeded estimates. GM traded higher.
Eli Lilly and Co. (NYSE:LLY $85) achieved Q3 earnings of $0.53 per share, or $1.05 ex-items, compared to the estimated $1.03, as revenues grew 9.0% y/y to $5.7 billion, topping the expected $5.5 billion. The company raised its full-year guidance, primarily due to uptake trends for new pharmaceuticals products and, to a lesser extent, to the positive impact of the euro. Separately, the company announced that it is reviewing strategic alternatives for its Elanco animal health business. LLY traded lower.
Today's mostly positive earnings reports appeared to foster optimism and Schwab's Chief Investment Strategist Liz Ann Sonders notes in her latest article, Pumped Up Kicks: Several Important Kickers for a Strong Capex Cycle, that U.S. business capital spending has already picked up; but an even sharper recovery could be in the cards for 2018. Read more on the Market Commentary page at www.schwab.com and follow Liz Ann on Twitter: @lizannsonders.
Business activity reports show expansion stronger than expected
The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output accelerated more than expected after rising to 54.5 in October, from September's 53.1 level, above the Bloomberg expectation of 53.4. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector this month surprisingly accelerated, rising to 55.9 from September's 55.3 level, versus forecasts calling for a dip to 55.2.
The Richmond Fed Manufacturing Activity Index fell to 12 in October, from 19 in September, and versus estimates of a decline to 17. However, a reading above zero denotes expansion.
Treasuries lost ground, with the yield on the 2-year note ticking 2 basis points (bps) higher to 1.58%, the yield on the 10-year note advancing 5 bps to 2.41% and the 30-year bond rate rising 4 bps to 2.92%.
Treasury yields extended a recent rally, while the U.S. dollar recovered from early losses as the markets received a boost from the flood of positive earnings reports, which came as the markets continue to grapple with the possibility of tax reform with last week's passing of a Senate budget resolution nudging the notion further down the long path toward implementation.
As noted in the latest Schwab Market Perspective: Preparing for the Latter Innings, U.S. stocks continue to grind higher, with little appearing able to knock them off course. The possibility of a pullback always exists but a melt up is also reemerging as a real possibility. Earnings tend to drive equity market direction, and the next few weeks should help set the tone for market action for the rest of the year. Expectations came down a bit as we entered reporting season and recent robust economic data gives support to the potential for companies to meet and/or beat estimates. Schwab's Vice President of Legislative and Regulatory Affairs, Michael T. Townsend notes in his article, Tax Reform Framework Released, But The Road Ahead Is Long, both chambers of Congress passing their budgets is a critical step because that could shorten the long road to approval. Read these articles on the Market Commentary page at www.schwab.com and follow Schwab on Twitter: @schwabresearch.
Tomorrow, the U.S. economic calendar will offer preliminary durable goods orders, forecasted to have increased 1.0% m/m during September following August's 2.0% rise, while ex-autos, orders are expected to gain 0.5% m/m. As well, new home sales will be announced, with economists forecasting a 1.1% month-over-month decline in September to a level of 554,000 units after falling 3.4% in August. The weekly MBA Mortgage Applications report will round out the day.
Europe mostly higher, Asia mixed
European equity markets traded mostly higher, with the host of favorable earnings reports in the U.S. seeming to bolster sentiment, while bond yields in the region gained ground to boost the financial sector. The euro ticked higher versus the U.S. dollar even as the preliminary Markit Eurozone Composite PMI Index declined to 55.9 in October from 56.7 in September, and below the 56.5 level that economists had projected. However, the index remained solidly in expansion territory as depicted by a reading above 50. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, and Vice President of Trading and Derivatives, Randy Frederick, note in the video, Is An Optimistic Outlook for Global Equities Warranted?, all of the world's top 20 economies are growing this year—a rare occurrence over the last decade, underpinning our positive outlook for global earnings. Read more on the Market Commentary page at www.schwab.com. Follow Jeff and Randy on Twitter: @jeffreykleintop and @randyafrederick. Spain rose despite the continued political turmoil on the heels of its announcement recently to take control of Catalonia, while the British pound finished lower as Brexit uncertainty lingered.
Stocks in Asia finished mixed on the heels of the modest retreat in the U.S. yesterday from a run as of late to fresh record highs, with global earnings season set to ramp up, which likely kept conviction in check. However, Japan extended its winning streak, with the Nikkei 225 Index registering its record 16th-straight positive session, even as the yen recovered some of a recent drop. The weekend's landslide election victory for Prime Minister Abe likely lingered to help preserve the winning streak. With Japanese markets contributing to the global rally, Schwab's Liz Ann Sonders discusses with Randy Frederick in the video, Tracking Sentiment: Are Investors Too Optimistic About Stocks?, that there seems to be no end in sight to the bull market in equities, but that doesn’t mean there’s nothing to worry about. See this video on the Market Commentary page at www.schwab.com. Mainland Chinese stocks rose, while shares in Hong Kong decreased. Australian securities ticked higher and South Korean equities finished flat. Indian stocks traded to the upside.
Tomorrow, the international economic docket will include CPI from Australia, the Ifo Business Climate Survey from Germany, industrial orders from Italy and Q3 GDP and the Index of Services from the U.K.