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Market Update

US Stock Futures Mixed as Exxon Miss Weighs; Tech Provides a Lift

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April 27, 2018

(Friday Market Open) As earnings season rolls on, it appears the economy is firing on all (or at least most) cylinders. But it may not be "full speed ahead" as a few potential headwinds remain.

Equities futures were mixed Friday morning as Exxon Mobil Corp.’s (XOM) earnings miss weighed on the  S&P and Dow but the tech heavy Nasdaq was still buoyed on strong earnings from the likes of Amazon.com (AMZN), Microsoft Corp. (MSFT) and chipmakers. Amazon’s performance, as well as a strong showing from Facebook (FB) apparently have provided market participants some optimism that the FAANG stocks could be an engine of future market growth.

In addition to strong tech news, global market sentiment overnight appeared to get a boost on optimism about peace between North and South Korea as leaders of both nations agreed to officially end the Korean War. Better late than never, right?

Data Point Roundup

The government’s first crack at Q1 gross domestic product was released before the opening bell and came in at +2.3%, a touch stronger than the consensus of economists provided by Briefing.com, which had forecasted advance Q1 GDP at 2.1%. GDP can help policymakers decide the course of interest rates. As of this morning, Fed funds futures reflect about a 40% chance of three rate hikes between now and the end of the year.

We also got a fresh reading on the Employment Cost Index (ECI) this morning, which showed an increase of 0.8% — also a shade above consensus estimates. ECI is one of the more closely-watched data points by the Fed as it considers interest rate policy. Earnings watchers, too, may be paying attention for any outsized upticks in labor costs. One of the key takeaways this earnings season might be the number of firms reporting solid earnings, only to see share prices fall on concerns over future input costs (more on that below).

Later this morning, the latest consumer sentiment reading from the University of Michigan, as well as the Chicago Business Barometer ("Chicago PMI") are scheduled to be released. PMI has been trending down in recent months—to 57.4 down from 67.6 a few months ago. Any reading above 50 is considered expansionary, but a continuation of the trend lower could indicate a weaker outlook from the Midwest manufacturing sector.

Earnings from Big Oil

Oil supermajors Chevron Corp. (CVX) and Exxon reported divergent earnings before the market opened on Friday. Analyst expectations had been high for the two companies’ Q1 results. A combination of OPEC’s continued output restrictions, a weaker U.S. dollar and geopolitical factors seem to have helped support higher crude prices, which likely led analysts to expect a significant boost to XOM and CVX’s upstream profits.

While Exxon’s profit did increase during Q1, its earnings fell short of analyst expectations. The company’s shares were down more than 2% in premarket trading. Meanwhile, competitor Chevron’s shares were up more than 1.8% premarket after the oil giant reported earnings that handily beat expectations.

Yesterday felt like a return of the glory days of 2017. A solid rally, strong earnings, robust economic indicators, and a downturn in volatility.

Earnings reports led the market higher on Thursday, with the S&P and Nasdaq ending more than 1% higher and the Dow close to that gain. The yield on the 10-year Treasury falling below the psychologically important 3% mark also helped sentiment.

In Thursday’s trading, a standout performer was Chipotle Mexican Grill (CMG), whose shares looked like they’d eaten one of the company’s giant burritos. Its stock rose more than 24 percent after reporting better-than-forecast earnings that were helped by increased menu prices. Thursday’s earnings report was the first under new CEO Brian Niccol.

Tech Sector Seeing Big Gains

But investors were also gorging on technology companies, with information technology the biggest gainer among S&P sectors.

Facebook climbed more than 9% as strong results seemed to relieve investors who had been worried about the company’s data privacy scandal. Advanced Micro Devices (AMD) shares rallied more than 13% after it reported stronger-than-expected results after hours Wednesday and gave a second quarter sales outlook that surprised on the upside. Qualcomm’s (QCOM) shares rose on news that its top and bottom line were better than forecast.

Intel Corp. (INTC) continued the good news for chipmakers after hours Thursday as it reported earnings and revenue that beat expectations and provided a better-than-expected outlook.

Also after hours Thursday, Amazon — technically a consumer discretionary stock, but still heavily involved in the tech game — said its Q1 profit more than doubled when analysts had been thinking it would contract year-over year. The strong results were helped by its cloud computing business. While it’s already well established that the company is successful at online retailing, what remains to be seen is how its entry into the brick and mortar space with its acquisition of Whole Foods Market and partnership with Best Buy (BBY) will play out.

Cloud competitor Microsoft (MSFT) beat earnings and revenue forecasts. Its shares were more than 3% higher in premarket trade as investors appeared to cheer the strength of its cloud business.

Energy outpacing S&P 500

FIGURE 1: ENERGY SECTOR OUTPACING S&P 500.

Ahead of earnings data from the big oilmakers, the energy sector (purple line) had been advancing ahead of the broader S&P 500 Index. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

What'll You Do for an Encore? While it's true this earnings season has been robust overall, we've seen a number of companies report solid earnings, only to see shares tumble on cautionary words from company executives about what may come next. Input costs, such as energy and labor (as noted in this morning's ECI number above), could pose challenges going forward. It's an important reminder that a stock's price is essentially the present value of future cash flows. A great earnings report, and a string of strong quarterly earnings, can offer historical perspective, but at the end of the day, the boilerplate disclaimer sums it up: Past performance doesn't guarantee future results.  

Commodities In Focus: As the yield on the 10-year Treasury moved above 3% this week, it highlighted analyst and investor expectations for heightened inflation. Rising commodities prices are one factor that seems to be stoking fears that the economy might move out of its Goldilocks phase — where the economy is neither too hot nor too cold. The World Bank said it expects prices for commodities including oil, metals and agricultural products to rise this year. But keep in mind that higher commodities prices often go hand in hand with a stronger economy as we make and buy more stuff. And while higher prices aren’t good for consuming companies — and the consuming public for that matter — they can be good for producers like miners and steel makers.

Key Inflation Reading: Speaking of inflation, early next week, the market will get a look at a key economic report that the Fed pays close attention to when thinking about rising — or falling — prices. Personal consumption expenditures (PCE) data are scheduled for release before the market opens Monday. If the trend continues, it might give the Fed a signal that rising prices aren’t that worrisome at the moment. The PCE price index rose 1.8% year-over-year in February, a modest increase comparable to the 1.7% gain we saw in January. If we see a similar number on Monday, the market may not react much because inflation expectations could already be baked into the cake.

Good Trading,

JJ

@TDAJJKinahan

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