Market Overview

CAT Climbs Into Driver's Seat To Start Earnings Parade, With Fed Meeting Ahead


Apple Inc. (Nasdaq: AAPL) and Caterpillar Inc. (NYSE: CAT) earnings. A Fed meeting. Inflation data. A payrolls report. Sounds like enough to fill a month’s economic calendar, but it all happens this week. 

Amid that cluster of headline events, investors continue to digest Friday’s strong read on Q2 economic growth while they ponder the social media industry landscape after disappointing use data from both Facebook, Inc. (NASDAQ: FB) and Twitter Inc. (NYSE: TWTR). 

The Dow Jones Industrial Average ($DJI) and the S&P 500 (SPX) are both up four-straight weeks, but the Nasdaq (COMP) has been down two-straight weeks. That raises the question whether this is the beginning of a turnover from the COMP and pure tech leadership back to big-cap leadership. A couple of stocks influenced Nasdaq heavily last week, so we’ll see if the index can get back on track in the days to come.

CAT Earnings: More than a Meow

The fun got started this morning with CAT, which saw its shares surge over 3 percent in pre-market trading after reporting adjusted earnings per share of $2.97, well above the $2.73 projection from Wall Street analysts. Revenue of just over $14 billion was slightly above estimates as well, and the company raised guidance. Although stock futures had been trading lower before CAT reported, it’s possible CAT’s healthy results could inject some positive vibes.

Recall at the company’s Q1 earnings call, CAT CFO Brad Halverson said then-earnings of $2.82 a share represented a “high water mark" for the year. Today’s release seems to have surpassed that mark. In a press release accompanying the numbers, CAT called first half results “outstanding,” cited “healthy order rates,” and said, “most end markets continue to improve.” 

Beyond the raw numbers, CAT’s call today looms large. The commodity recovery that helped benefit CAT in some of its end markets has also negatively impacted the company by adding to its material costs. On last quarter’s earnings call, management said they expect higher material costs, particularly steel, to be a headwind all year. In addition, 25 percent tariffs on U.S. steel imports cast a large shadow over companies that rely heavily on the material. Consider listening for any updates on how all this is affecting CAT.

Earnings Sizzle So Far

Aside from Netflix inc. (NASDAQ: NFLX), FB, TWTR, and a small handful of other disappointments, it’s been a bountiful earnings season to date by most measures. Through Friday, average earnings growth for S&P 500 companies stood at 21.3 percent, according to FactSet. Of the companies reporting, 83 percent have beaten Wall Street analysts’ earnings estimates and 73 percent have beaten on sales. That’s well above average, and the earnings beat percentage is the highest since FactSet began tracking this back in 2008.

Despite some of the worries that helped send the tech bellwether Nasdaq Composite (COMP) to a 1 percent loss last week, at the end of the day what really matters is healthy earnings. That’s what we’ve been seeing. A host of major earnings reports awaits investors with the season about 50 percent over (see more below).

Last quarter’s 4.1 percent gross domestic product (GDP) growth helps put the corporate strength into context. There just seems to be a lot of evidence the economy is really humming right along, with wage growth the only part that seems to be struggling. But everything else is really hard to argue with. The last four quarters averaged about 3 percent economic growth, a definite improvement from recent years. 

Pondering Payrolls 

That said, this is another week and investors face a shiny new batch of data. None are more important, arguably, than Friday’s monthly payrolls report. Job gains the last few months hit the economic sweet spot, averaging 211,000 but without enough wage growth to get most investors too worried about overheating inflation. In June, jobs grew 213,000 and wages rose 0.3 percent. Over the last year through June, wages are up 2.7 percent. 

Wage growth again looms as a potential market mover. Anything with a “3” in front of it on the annual growth chart could potentially raise eyebrows as investors start wrestling with the dreaded “I” word (inflation). Wall Street analysts expect July jobs growth of 190,000 and monthly wage growth of 0.3 percent, according to, and neither of those figures would in themselves seem like enough to raise too many eyebrows about price pressure if that’s how it shakes out. We’ll preview the report in more detail later this week.

Speaking of inflation, the Fed’s preferred measure of Personal Consumption Expenditure (PCE) prices is due tomorrow. This indicator has looked pretty benign recently, rising 2.3 percent year-over-year in the most recent report and 2 percent for the core number that excludes food and energy. Wall Street analysts expect just a 0.1 percent month-to-month rise for June, down from 0.2 percent for May, according to

Fed Meets As Market Sees Rates Remaining Flat

The day after PCE, the Fed gets a chance to weigh in on the economic picture as it concludes its Federal Open Market Committee (FOMC) meeting. Chances of a rate hike appear highly unlikely, but not completely out of the realm of possibility. The futures market places rate hike odds at 2.5 percent. 

The Fed raised rates at its meeting last month, and futures prices indicate a better than 90 percent chance that the Fed will adjust the dial for a third time this year by the September meeting and a 62 percent chance of a fourth hike by year-end. This month’s meeting is sans press conference, so it seems unlikely to bring much in the way of fireworks.

2018-07-30-chart.jpg FIGURE 1:  Nasdaq Lags After Fast July Start: With just two sessions left in July, the S&P 500 (candlestick) is outpacing both the Nasdaq (blue line) and the Russell 2000 small-cap index (purple line). The Nasdaq got off to a strong start, posting new record highs earlier in the month, but fell off track once earnings started to raise doubts about some major components of the 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.

GDP Considerations

While 4.1 percent GDP growth is never a bad thing, there are some caveats to consider. First, the government gets two more cracks at this estimate, so 4.1 percent isn’t final. Also, some analysts wonder if this kind of growth is sustainable over the longer term. Some of the numbers deeper down in the report suggest one-time factors that might not be repeatable. For instance, exports were 5.5 times the average of the last 16 quarterly reports, leading to suggestions that foreign countries loaded up their shopping carts with U.S. products ahead of possible tariffs that might be coming down the pike. Something like that isn’t necessarily going to happen again in Q3 or Q4. There was also a huge and unexpected jump in Q2 federal government spending, which again might be unrepeatable. All this isn’t to say economic growth is anything other than great, only to put things in perspective looking ahead.

China Stimulus Potentially Bullish, If Trade War Doesn’t Interfere

One potentially bullish development last week that might get a bit overlooked amid all the earnings news was China starting to take measures, including tax cuts, to stimulate its economy. Remember, China is like the gorilla in the room of the world markets. It buys vast amounts of commodities as well as other goods and services, so if the government there is really serious about jump-starting things, there could be a wide, positive impact. The question is whether the U.S. economy can get a boost from China’s actions considering the possibility of a wider tariff war between the countries. The administration’s threat to extend tariffs to hundreds of billions of additional Chinese goods hasn’t gone away. News from some of the companies reporting last week—including General Motors (GM)—that costs are rising, might point to the possible dangers of a trade dispute. About 40 percent of companies reporting so far have mentioned tariffs on their calls, according to media reports.

After Caterpillar, Apple Dominates Earnings Picture

This is the second-biggest week of the earnings season, right behind last week. Some of the key reporting firms include Apple, Tesla Inc. (NASDAQ: TSLA), MGM Resorts International (NYSE: MGM), and Activision Blizzard, Inc. (NASDAQ: ATVI). Apple is likely to dominate proceedings Tuesday when it reports after the close. So far, the picture has been mixed for the “FAANGs,” with NFLX and FB disappointing many investors and seeing their shares run down, while, Inc. (NASDAQ: AMZN) and Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL), both looked very healthy. We’ll have a preview of AAPL’s earnings before the company reports, so stay tuned. As always, iPhone volumes will probably stand out as a key component to watch.

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