Stocks Pressured by Corporate Earnings and Higher Bond Yields

Rich Asplund - Barchart - Tue Aug 1, 2023

What you need to know…

The S&P 500 Index ($SPX) (SPY) Tuesday closed down -0.27%, the Dow Jones Industrials Index ($DOWI) (DIA) closed up +0.20%, and the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.25%.

Stocks on Tuesday settled mixed, with the Dow Jones Industrials climbing to a 17-month high. The broader market was under pressure Tuesday from some disappointing quarterly earnings results and higher bond yields. Zebra Technologies closed down more than -17% after reporting disappointing Q2 net sales, and Norwegian Cruise Line Holdings closed down more than -12% to lead cruise stocks lower after forecasting weaker-than-expected Q3 EPS. An +8% rally in Caterpillar pushed the Dow Jones Industrials higher after Caterpillar reported stronger-than-expected Q2 adjusted EPS.

Q2 earnings season is mostly positive so far, with 83% of the 271 companies in the S&P 500 that have reported earnings results beating estimates. That is up from 74% a year ago, according to Bloomberg data.

U.S. stocks had some negative carryover from a fall in European stocks as BMW AG dropped more than -6% after warning about higher costs, and DHL Group tumbled more than -3% after giving weak profit guidance. Also, concern about China’s economy dampened global growth prospects after China's Jul new home sales fell by the most in a year and after the Caixin Jul manufacturing PMI contracted by the most in 6 months.

Tuesday’s U.S. economic news was weaker than expected and also weighed on stocks. The Jul ISM manufacturing index rose +0.4 to 46.4, weaker than expectations of 46.9. Also, the Jun JOLTS job openings report fell -34,000 to a 2-year low of 9.582 million, showing a weaker labor market than expectations of 9.600 million. In addition, Jun construction spending rose +0.5% m/m, weaker than expectations of +0.6% m/m.

Hawkish comments Tuesday from Chicago Fed President Goolsbee helped push bond yields higher and weighed on stocks when he said that while recent data gave him hope that inflation can cool without too much economic pain, he wants to see more of a trend develop of lower prices before the Fed stops raising interest rates.

Comments Tuesday from Atlanta Fed President Bostic were slightly dovish when he said there's been a "significant reduction" in inflation breadth, and he doesn't expect that a Fed rate hike will be necessary in September. He added that he doesn't see a Fed rate cut until the second half of 2024 "at the earliest."

The markets are discounting the odds at 17% for a +25 bp rate hike at the September 20 FOMC meeting.

Global bond yields Tuesday moved higher. The 10-year T-note yield rose to a 3-week high of 4.055% and finished up +8.6 bp at 4.045%. The 10-year German bund yield rose +6.5 bp at 2.557%. The 10-year UK Gilt yield rose to a 2-week high of 4.400% and finished up +9.0 bp at 4.399%.

Overseas stock markets Tuesday settled mixed. The Euro Stoxx 50 closed down -1.43%. China’s Shanghai Composite Index today closed unchanged. Japan’s Nikkei Stock Index closed up +0.92%.

Today’s stock movers…

Zebra Technologies (ZBRA) closed down more than -17% to lead losers in the S&P 500 after reporting Q2 net sales of $1.21 billion, weaker than the consensus of $1.31 billion, and forecasting Q3 adjusted EPS of 60 cents to $1.00, well below the consensus of $3.78.

Cruise line operators are falling today after Norwegian Cruise Line Holdings reported Q2 passengers carried were 693,085, below the consensus of 719,589, and forecasted Q3 adjusted EPS of 70 cents, weaker than the consensus of 79 cents. As a result, Norwegian Cruise Line Holdings (NCLH) closed down more than -12%. Also, Carnival (CCL) closed down more than -4%, and Royal Caribbean Cruises (RCL) closed down more than -1%.

Rockwell Automation (ROK) closed down more than -7% after reporting Q3 adjusted EPS of $3.01, weaker than the consensus of $3.18.

Illinois Tool Works (ITW) closed down more than -4% after reporting Q2 operating revenue of $4.07 billion, weaker than the consensus of $4.13 billion.

Molson Coors Beverage (TAP) closed down more than -4% after reporting Q2 Americas net sales of $2.62 billion, weaker than the consensus of $2.66 billion, and forecasting full-year free cash flow of $1.20 billion, below the consensus of $1.23 billion.

Hologic (HOLX) closed down more than -3% after forecasting Q4 adjusted EPS of 80 cents-87 cents, below the consensus of 89 cents.

Regional bank stocks were under pressure Tuesday and weighed on the broader market. Citizens Financial Group (CFG) and Zions Bancorp (ZION) closed down more than -3%. Also, KeyCorp (KEY), Comerica (CMA), and US Bancorp (USB) closed down more than -2%. In addition, Franklin Resources (BEN) and Fifth Third Bancorp (FITB) closed down more than -1%.

Arista Networks (ANET) closed up more than +19% to lead gainers in the S&P 500 after reporting Q2 revenue of $1.46 billion, well above the consensus of $1.38 billion.

Global Payments (GPN) closed up more than +9% after reporting Q2 adjusted net revenue of $2.20 billion, above the consensus of $2.19 billion, and raised its full-year adjusted revenue forecast to $8.66 billion-$8.74 billion from a prior estimate of $8.64 billion-$8.74 billion, the midpoint above the consensus of $8.65 billion.

Caterpillar (CAT) closed up more than +8% to lead gainers in the Dow Jones Industrials after reporting Q2 adjusted EPS of $5.55, well above the consensus of $4.54.

Leidos Holdings (LDOS) closed up more than +6% after reporting Q2 revenue of $2.84 billion, better than the consensus of $3.73 billion, and raising its full-year revenue estimate to $14.9 billion-$15.2 billion from a previous estimate of $14.7 billion-$15.1 billion.

Eaton Corp Plc (ETN) closed up more than +6% after reporting Q2 adjusted EPS of $2.21, stronger than the consensus of $2.11, and raising its full-year adjusted EPS estimate to $8.65-$8.85 from a previous estimate of $830-$8.50.

Stanley Black & Decker (SWK) closed up more than +4% after reporting Q2 net sales of $4.20 billion, better than the consensus of $4.12 billion.

SBA Communications (SBAC) closed up more than +4 after reporting Q2 AFFO/share of $3.24, above the consensus of $3.14, and raising its full-year AFFO/share estimate to $12.80-$13.16 from a prior view of $12.55-$12.91.

Welltower (WELL) closed up more than +2% after reporting Q2 revenue of $1.67 billion, stronger than the consensus of $1.59 billion.

Across the markets…

September 10-year T-notes (ZNU23) Tuesday closed down -17 ticks, and the 10-year T-note yield rose +8.6 bp to 4.045%. The 10-year T-note yield Tuesday rose to a 3-week high today of 4.055%. Sep T-notes today were under pressure from a slide in 10-year UK gilt prices to a 2-week low. Also, concerns about larger U.S. government debt sales are weighing on T-notes on expectations for the Treasury on Wednesday to announce a boost in its quarterly refunding to $102 billion from $96 billion. Losses in T-notes were pared momentarily following the release of Tuesday’s weaker-than-expected U.S. economic reports, including JOLTS job openings, ISM manufacturing, and construction spending.

T-notes maintained moderate losses Tuesday on hawkish comments from Chicago Fed President Goolsbee, who said he wants to see more of a trend develop of lower prices before the Fed stops raising interest rates.

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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.