July 26, 2019 – Earnings dominated the financial news this week. Earnings also explain the divergence in performance of the major indices.
For the week, the Dow was basically unchanged, while broader indices posted decent gains. Earnings from Caterpillar (CAT) and Boeing (BA) weighted on the Dow. Boeing’s report is hard to extrapolate from as all of quarter’s weakness was pinned on the ongoing troubles with the 737 Max which may be the case, but could also be convenient place to pin a weak quarter. Caterpillar on the other hand, just didn’t make as many sales as expected, and also had a hard time making sales at higher prices. The company also lowered its guidance for the rest of the year.
Meanwhile, over on the NASDAQ, big tech earnings remain strong. Quarterly reports from Facebook and Google topped expectations. Amazon fell short, but Amazon has demonstrated less regard for the quarterly earnings game than perhaps any mega-cap stock in history. The online retail giant’s miss was also due to increased spending as it builds out its own delivery network, so the miss was due to weakness in the actual business.
That constellation of earnings results, in light of Friday’s GDP report, starts to look like the continuation of a trend. The first estimate of second quarter GDP showed growth at a rate of 2.1%, down from 3.1% in the first quarter. Slowing business investment was blamed for much of the decline, but consumers and government spending rose to help offset the decline in business spending.
Strength in consumer spending has been a trend we’ve commented on several times recently. With the Federal Reserve all but guaranteed to lower interest rates next week, it is not impossible we could get a boost in business spending, but longer sections of the yield curve, where businesses typically borrow is already at multi-year lows, so it is hard to imagine why a 25 basis point cut to overnight rates would spur a lot of new investment.
As for the market, barring a big surprise from the Fed next week, earnings will continue to be the driver. Growth isn’t as strong as it was a year ago, but earnings season is largely about marking expectations to reality (although some people get it backwards), so as long results keep coming in largely in-line with expectations, we’re likely to see a continued gradual climb, particularly in those segments that are more exposed to consumer spending.
All told this week, the S&P gained 1.65%, the Nadsaq added 2.26%, and the Dow Jones rose 0.14%.
Given the market’s lack of movement this week, last week’s support and resistance study remains valid. You can see that here.
The S&P 500 continued to find support at its 20-day moving average (blue line) early this week. The action-packed earnings week helped to boost the S&P, allowing for new highs to be set Friday. The sideways movement we’ve seen in the S&P since the beginning of July has also allowed for new support levels to begin forming between 2,980-3,020.
Dow Jones Industrial Average