With Dollar’s Fizzle, Stocks Sizzle!
Stocks ended mixed on Monday, most of the excitement and attention keying in on Apple (AAPL) and Amazon (AMZN), the 2 tech giants which pushed the NASDAQ to another historic high. It was the index’s 13th winning day in the 15 trading days so far this month. The NASDAQ is trading up almost 20% this year.
About 180 S&P 500 companies are expected to report this week, including tech giants like Facebook (FB) and Amazon (AMZN). After closing, it was Google (GOOGL) which reported Q2 earnings. Its earnings declined against the backdrop of a huge $2.7 billion fine that European authorities imposed on the company in June after the company violated the continental bloc’s antitrust laws. The company succeeded in outstripping the market’s revenue forecast, its stock though, regardless, falling 3% in response. It will be important to see how trading in the stock affects the market as a whole and more specifically, how it affects the tech sector.
The earnings season opened strong. As of Friday, 73% of the S&P 500 companies already reporting had beaten out analysts’ bottom line forecasts, 77% beating out the consensus on the top line. Investors entered the earnings season with high hopes, Wall Street analysts having projected that firms’ earnings growth would hit 6.2%.
In summary for the day, the Dow Jones shed 0.3%, the S&P 500 closing lightly off by 0.1% and the NASDAQ rising 0.4%.
On the economic front, Markit’s PMI index recorded its highest reading in 6 months. The growth in business activity was mostly driven by a sharp rise in July’s manufacturing activity.
Existing home sales fell 1.8% last month to an annualized rate of 5.52 million units, coming out slightly above expectations.
Tuesday: The weak dollar is likely to give bulls more room to rally, while also pushing international firms’ earnings up in the second half of the year. With the latest decline, investors are assessing the effect of the plunging dollar on firm earnings. The dollar index has fallen 8% year to date.
The dollar took off right after the elections in November ’16 in light of expectations for economic stimulus from Donald Trump’s growth-driven policies. Since then, though, it would seem that Trump hasn’t made a single move of substance on that front, from tax reform to an economic stimulus package. Congress’s showdown over healthcare continues into this week, all eyes now on the Senate’s new bill. As a result, the Trump factor is non-existent to say the least, meaning that the weaker dollar now should push up American-based firm earnings from international operations.
The effect of the weak dollar is primarily felt by companies with high exposure to foreign currency revenues. Take for example the S&P 500, where 42.3% of revenues come from overseas.
According to analysts at Morgan Stanley, every 1% decline in the value of the dollar is equal to a 0.5% rise in the earnings of S&P 500 companies; the analysts contend that the weak dollar could affect companies in the second half of the year. Based on that metric, an 8% decline in the dollar by year’s end is likely to be translated into gains of another 4% in 2018 earnings. Morgan Stanley analysts are arguing that the dollar is likely to record a drop of another 5% this year – and in such an event, the contribution to earnings next year from dollar weakening could even come to 6.5%.
The U.S. companies with the highest exposure to international sales include QCOM, with 98% of its sales coming from abroad, MU, with 84%, LRCX, with 92% and NVDA, with 87%.
Earnings reports are expected today before opening from LLY, CAT, GM, UTX, MCD, KMB, and DD. After closing, be primed for the numbers of T, JNPR, AMD, X, AKAM, CMG, and ESRX.
The Economic Diary on Tuesday will be packed, and will include the Case-Shiller home price index before the opening bell at 9:00, along with the FHFA Housing Price Index (HPI). At 10:00, be primed for the Consumer Confidence Index.
Tuesday’s Hot Stocks: GOOGL, APC, MCD, KMB, CAT, DD
Have a great trading day!
|Monday||10:00||Existing Home Sales||5.58M||Medium|
|Tuesday||9:00||S&P Case-Shiller Home Price Index||5.7%||Medium|
|Tuesday||9:00||FHFA Housing Price Index||0.7%||Medium|
|Wednesday||10:00||New Home Sales||610K||Medium|
|Wednesday||10:30||Crude Oil Inventories||–||Low|
|Wednesday||14:00||FOMC Rate Decision||–||High|
|Friday||8:30||Employment Cost Index||0.6%||Medium|
|Friday||10:00||Michigan Sentiment – Final||93.1||High|
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