The major domestic equity indexes were lower on Tuesday after a warning from the White House to China pressured technology shares. At the same time, the Street looked to an expected interest rate cut at the conclusion of the Federal Reserve’s monetary policy meeting on Wednesday.
Apple’s results after the markets closed illuminated the impact of trade tensions with China. Shares of Apple were down 0.08%, contributing the most to the tech sector’s 0.5% drop.
Commerce Department data indicated that consumer spending and prices rose moderately in June, pointing to slower economic growth and bolstering the case for monetary easing.
Just over half of the S&P 500 companies have released second-quarter earnings, of which 75.9% have exceeded consensus expectations, according to Refinitiv data.
Procter & Gamble rose 4.3% after the consumer products maker exceeded quarterly revenue estimates.
Shares of Capital One fell after the credit-card issuer said information on 106 million people had been compromised.
Pfizer’s shares fell 6.6%, weighing the most on the healthcare index after brokers downgraded the stock following the company’s announcement on Monday that it would spin off its Upjohn unit and merge it with Mylan.
Merck was higher after reporting better-than-expected second-quarter results and raising its full-year earnings forecast.
Spending Could Support Rate Cut
Consumer spending and prices rose moderately in June, pointing to slower economic growth and benign inflation that could see the Federal Reserve cutting interest rates on Wednesday for the first time in a decade.
Consumer spending, which accounts for more than two-thirds of all economic activity, gained 0.3% as an increase in services and outlays on other goods offset a decline in purchases of motor vehicles.
Data for May was revised up to show consumer spending rising 0.5% instead of the previously reported 0.4% advance
The data was included in last Friday’s second-quarter gross domestic product report, which showed consumer spending increased at a 4.3% annualized rate, accelerating from a tepid 1.1% pace in the January-March period.
Consumer spending helped to offset weak exports, business investment and a slowdown in inventory accumulation. The economy grew at a 2.1% rate last quarter, pulling back from the first quarter’s brisk 3.1% pace.
The economy is slowing largely as the stimulus from last year’s $1.5 trillion tax cut package fades.
Consumer prices as measured by the personal consumption expenditures (PCE) price index edged up 0.1% in June as food and energy prices fell. The PCE price index gained 0.1% in May. In the 12 months through June, the PCE price index rose 1.4% after a similar increase in May.
Excluding the volatile food and energy components, the PCE price index rose 0.2% last month, increasing by the same margin for a third straight month. That lifted the annual increase in the so-called core PCE price index to 1.6% from 1.5% in May.
The core PCE index is the Fed’s preferred inflation measure and has undershot the U.S. central bank’s 2% target this year.
When adjusted for inflation, consumer spending gained 0.2% in June. This so-called real consumer spending rose 0.3% in May. Last month’s small gain in core consumer spending likely sets up consumption for a step-down in the third quarter after the robust growth recorded in the April-June period.
Last month, spending on goods rose 0.3%. Spending on services also rose 0.3%.
Consumer spending in June was supported by a 0.4% rise in personal income, which followed a similar increase in May. Wages increased 0.5%. Savings hit $1.34 trillion from $1.31 trillion in May.
Goldman Raises S&P 500 Target on Fed Bet Even as Profits Slow
While corporate America’s earnings engine is about to cool, Goldman Sachs Group says an interest-rate cut by the Fed will continue to send stock prices higher this year.
The bank cut 2019 earnings estimates for the S&P 500 Index to $167 a share from $173, citing an economic slowdown, lower oil prices and weak margins, according to a note Tuesday from strategists led by David Kostin.
At the same time, the group raised its year-end price target by 100 points to 3,100, implying a 3% gain for the equity benchmark in the final five months of the year.
The S&P 500 surpassed Goldman’s prior year-end target earlier in July as investors grew confident the Fed will dial back interest rates to extend the longest economic recovery on record.
Tuesday’s move aligns Goldman with a growing Wall Street crowd predicting a slowdown in corporate earnings that won’t dent the stock market. Since the start of May, 13 of 22 strategists tracked by Bloomberg have slashed earnings estimates, while none have cut year-end price targets.
While corporate earnings growth has slowed in the first half of 2019, there appears to be a willingness to pay up for equities as the Fed prepares to cut rates for the first time in a decade. The S&P 500 has rallied 20% this year, and by Goldman’s count, more than 90% of the gains come from an expansion in price-earnings ratios.
Equity valuations will keep growing to support the market next year, Goldman said, although it lowered its 2020 earnings forecast to $177 a share from $181 while initiating a price target of 3,400. That represents roughly a 13% increase from the S&P 500’s last close.
Pending Home Sales Increase
Contracts to buy previously owned homes were higher than expected in June, the National Association of Realtors said on Tuesday in a report that showed lower mortgage rates could be giving support to the housing market.
The NAR’s pending home sales index rose to a reading of 108.3 last month, up 2.8% from the prior month. May’s index was unrevised at 105.4.
Pending home contracts are a forward-looking indicator of the health of the housing market because they become sales one to two months later.
Pending home sales were up 1.6% in the 12 months through June, snapping a 17-month streak of year-over-year decreases.
Consumer Confidence via Bloomberg
This morning’s sharp rebound in consumer confidence is good news for equity investors, right? After all, it suggests that the primary engine of the economy is chugging along nicely.
Well, maybe. But it really depends upon your time horizon. Consumer confidence is, after all, a cyclical, mean-reverting measure. And while this morning’s reading may suggest that recession is not imminent, it’s equally the case that it generally doesn’t get any better than this — and that has implications for strategic equity investments.
In fact, there’s a pretty good (negative) correlation between the level of consumer confidence and the change in the S&P 500 over the ensuing five years.
Buying stocks at the top in consumer confidence generally gets you lousy returns, while buying at the nadir is the way to fortune (if not fame). Since 1967, you’ve never lost money buying the SPX with consumer confidence below 60 and holding for five years.
On the other hand, you’ve never made more than 5% per year buying stocks with confidence above 130 — and on average you’ve lost money. Perhaps this time really is different, as the Fed tries to guide the economy into a soft landing.
However, if you were looking for a statistical demonstration of the aphorism that you should be “sellin’ when they’re yellin’ and buyin’ when they’re cryin’,” this is a pretty good one.
Apple Exceeds Expectations
Apple’s quarterly earnings and revenue beat Wall Street targets on Tuesday and its forecast for fourth-quarter sales exceeded expectations as well, with Chief Executive Tim Cook telling Reuters that “marked improvement in greater China” drove the results.
Services revenue in the fiscal third quarter rose 12.6% to $11.46 billion, a new record, but missed expectations of $11.73 billion, according to IBES data from Refinitiv. Apple CEO Tim Cook told Reuters that after factoring out a one-time payment from lawsuits a year ago and foreign-exchange effects, the services segment growth rate would have been 18%.
China sales fell 4% to $9.16 billion, after declining 22% in the fiscal second quarter. The Chinese smartphone market shipments declined 6% in Apple’s fiscal third quarter, according to market research firm Canalys.
Trade tension between the United States and China have weighed heavily on Apple because it has slowed down economic growth in China, a major market for Apple. Apple effectively cut iPhone prices in China earlier this year after currency exchange rates had made its phones too expensive for many Chinese consumers.
Cook told Reuters that results for mainland China, a subset of Apple’s greater China region, were positive.
“We actually grew in mainland China,” Cook told Reuters. “Non-iPhone revenue grew 17%. We grew in every category outside of iPhone.”
Apple said it expects revenue for the current fiscal fourth quarter of between $61 billion and $64 billion, compared with analyst estimates of $61.02 billion.
For the fiscal third quarter ended in June, Apple reported a 1% rise in revenue to $53.8 billion and a 7% drop in earnings per share to $2.18, compared with expectations of $53.39 billion and $2.10 per share, according to Refinitiv data. iPhone sales fell 12% to $25.99 billion, about in line with expectations of $25.96 billion, according to Refinitiv data.
Apple’s market share in China declined to 5.8% from 6.4%, according to market research firm Canalys, in part because smartphone rival Huawei Technologies gained market share to become the top handset seller in the country.
But Apple experienced a smaller market share loss than competitors such as Xiaomi Corp, Oppo and Vivo, according to Canalys data. Cook said that iPhone price adjustments, plus the Chinese government’s move to cut phone taxes, helped keep iPhone sales in China from eroding further.
Apple shares have gained more than 20% since early June, when shares dropped on news that the Justice Department had jurisdiction over the company in a potential probe as part of a broader review of whether technology giants engage in anticompetitive practices.
The Justice Department formally announced the review last week but did not name any companies that would be scrutinized. Officials said the efforts would focus on “search, social media, and some retail services online,” an apparent reference to Alphabet Inc, Amazon.com Inc and Facebook Inc rather than Apple specifically.
But Apple has faced complaints from competitors and developers over its practice of keeping 15% to 30% of revenue earned by developers on its App Store. In March, Spotify Technology, Apple’s chief rival in the streaming music space, filed an antitrust complaint against Apple with European Union officials.
Apple’s services, which include Apple Music, the App Store and iCloud, are seen as a source of growth for Apple as iPhone sales have slowed. In the coming months Apple plans to release a credit card and subscription services for gaming and television.
Apple said revenue for its “Wearables, home and accessories” segment that contains devices like the Apple Watch and Air Pods was $5.53 billion, compared with analyst estimates of $4.81 billion.
Apple said it returned more than $21 billion to shareholders during the fiscal third quarter, including $17 billion in share repurchases. It declared a dividend of 77 cents per share.