U.S. equities finished mixed in a lackluster trading session, as Q4 earnings season shifted into a higher gear today. Corporate results from several Dow members were in focus, as 3M missed estimates and reported that it would reduce its global workforce by approximately 2,500 jobs. Verizon Communications and Travelers Companies reported bottom-line results that were in line with expectations, and the former offered some disappointing full-year guidance, while Johnson & Johnson missed estimates amid a decline in revenues citing unfavorable foreign exchange and lower COVID vaccine sales. Additionally, Lockheed Martin bested forecasts but issued EPS guidance that was lower than anticipated. The economic calendar offered several reports on domestic activity, as manufacturing and services PMIs unexpectedly rose but remained contractionary in January, while manufacturing activity in the Richmond region fell much more than expected. Treasury rates were lower, and the U.S. dollar dipped, while crude oil prices fell, and gold was higher. Asian stocks rose although volume remained light as Chinese and South Korean markets were closed for a holiday, while European stocks were mixed amid a host of PMI data across the globe.
The Dow Jones Industrial Average rose 104 points (0.3%) to 33,734, while the S&P 500 Index shed 3 points (0.1%) to 4,017, and the Nasdaq Composite declined 30 points (0.3%) to 11,334. In moderate volume, 3.3 billion shares of NYSE-listed stocks were traded, and 5.6 billion shares changed hands on the Nasdaq. WTI crude oil was $1.49 lower at $80.13 per barrel. Elsewhere, the gold spot price was up $10.00 to $1,938.60 per ounce, and the Dollar Index lost 0.2% to 101.96.
Dow member 3M Company (MMM $115) posted adjusted Q4 earnings-per-share (EPS) of $2.28, below the $2.36 FactSet estimate, as revenues declined 6% year-over-year (y/y) to $8.08 billion, relatively in line with the $8.05 billion expectation. MMM noted that its EPS was impacted by divestitures, foreign currency translation due to the strength of the U.S. dollar, headwinds from the decline in disposable respirator demand, along with its exit out of Russia. Chairman and CEO of the multinational tech and industrial manufacturer, Mike Roman, noted, "The slower-than-expected growth was due to rapid declines in consumer-facing markets – a dynamic that accelerated in December – along with significant slowing in China due to COVID-related disruptions. As demand weakened, we adjusted manufacturing output and controlled costs, which enabled us to improve inventory levels." He went on to discuss how the year was impacted by inflation, global conflicts, and economic softening, and that they expect macroeconomic challenges to persist in 2023. MMM provided full-year EPS guidance which may not be comparable to estimates due to headwinds, and estimated a 2-6% decline in adjusted total sales growth. The company also noted that it will reduce approximately 2,500 global manufacturing roles based on what it saw in its end markets. Shares fell.
Dow component Verizon Communications Inc. (VZ $40) reported adjusted Q4 EPS of $1.19, in line with estimates, as revenues rose 3.5% y/y to $35.25 billion, above the estimated $35.09 billion. The telecommunications conglomerate closed 2022 with Q4 results that were marked by wireless service revenue growth and the highest total wireless retail postpaid net additions in seven years. Hans Vestberg, Chairman and CEO, noted how the company delivered in the operational expectations and financial targets set in the second half of 2022, and went on to say, "We are rapidly building out our C-Band spectrum with the most aggressive network deployment in our company's history and are well positioned to improve and accelerate our performance. Wireless mobility and nationwide broadband will be two of the most significant contributors to our growth for the next several years." The company provided a full-year EPS guidance range that was lower than anticipated. VZ gained ground.
Dow member Johnson & Johnson (JNJ $168) announced adjusted Q4 EPS of $2.35, versus the $2.23 forecast. Revenues declined 4.4% y/y to $23.70 billion, compared to the $23.90 billion estimate, as a result of unfavorable foreign exchange translations and reduced COVID-19 vaccine sales versus the prior year. The medical device and pharmaceutical corporation noted a 1.3% y/y sales growth to $94.90 billion, which was primarily driven by strong commercial execution but also partially offset by foreign exchange. JNJ was nearly unchanged.
Dow component Travelers Companies Inc. (TRV $193) posted Q4 core EPS of $3.40, in line with estimates, as revenues rose 6.9% y/y to $9.64 billion, noticeably higher than the expected $8.76 billion. The insurance company noted how core income decreased compared to the prior year’s quarter as it was impacted by higher catastrophe losses, lower underlying underwriting gain, and lower net investment income. Chairman and CEO Alan Schnitzer discussed how the results of the company’s commercial business were exceptional, and went on to say, "Underlying results in Personal Insurance remain challenged by elevated industrywide loss costs. We recorded another quarter of progress with strong pricing and other actions to address these challenges." Shares of TRV increased.
Lockheed Martin Corporation (LMT $449) reported adjusted Q4 EPS of $7.79, above the estimated $7.41, as revenues increased 7.1% y/y to $18.99 billion, higher than the $18.28 billion prediction. James Taiclet, Chairman, President and CEO of the American aerospace and defense technology corporation, stated, "As we track toward our objective of growth resumption in 2024, we will continue to execute our dynamic and disciplined capital allocation program, by reinvesting in our business and pursuing growth opportunities, and returning capital to shareholders." LMT issued full-year EPS guidance that came in below forecasts, and offered a revenue range that was in line with expectations. Shares were higher.
Q4 earnings season shifted into a higher gear today, and investors continue to grapple with the ultimate impact of aggressive Fed actions to try to combat rising prices. Schwab’s Chief Investment Strategist Liz Ann Sonders notes in our latest Schwab Market Perspective: Slowdown or Recession?, how although it's possible the Federal Reserve will guide the economy to a "soft landing," evidence has been pointing toward recession.
With the February 1 monetary policy decision approaching, the Fed is expected to continue to downshift to a 25-basis point (bp) rate hike after following up four 75-bp rate increases with a 50-bp rise in December. However, the Fed signaled that restrictive policy will likely have to remain in place for longer and at a potentially higher "terminal rate" than expected.
Manufacturing and services PMI contracted, along with Richmond manufacturing activity
The preliminary S&P Global U.S. Manufacturing PMI Index for January remained in contraction territory (a reading below 50), but unexpectedly rose to 46.8 from December's unrevised 46.2 figure, and versus the Bloomberg consensus estimate of a slight decline to 46.0. The preliminary S&P Global U.S. Services PMI Index also gained ground but remained in contraction terrain, as the key U.S. sector in January increased to 46.6, compared to expectations of a modest gain to 45.0 from December's upwardly revised 44.7 figure.
The Richmond Fed Manufacturing Activity Index fell much more than expected into contraction territory (a reading below zero). The Index dropped to -11 in January from a reading of 1 in December, and compared to the expected decline to -5. Shipments and employment became contractionary, while the growth in wages accelerated.
Treasury rates were lower, as the yield on the 2-year note declined 2 bps to 4.21%, the yield on the 10-year note decreased 6 bps to 3.46%, and the 30-year bond rate lost 8 bps to 3.61%.
Bond yields have sen heightened volatility lately but remain solidly higher over the past 12 months as the markets react to aggressive Fed monetary policy actions. Schwab's Chief Fixed Income Strategist Kathy Jones discusses in her article, Fixed Income Outlook: Bonds Are Back, how we see opportunities in 2023 for the bond market to provide attractive yields at lower risk than we've seen for several years.
The only item on tomorrow's economic calendar is the MBA Mortgage Applications Index for the week ended January 21.
European stocks mixed amid a swath of PMI data
Stocks in Europe were mixed as investors reacted to a host of preliminary PMI reports. France’s manufacturing PMI, along with German and the Eurozone’s services activity, improved more than expected and moved into expansion territory in January. Conversely, France and the U.K.’s services PMI unexpectedly declined further into contraction territory, as did Germany’s manufacturing activity. Lastly, the Eurozone and the U.K.’s manufacturing PMI declined and remained contractionary.
European markets have experienced a strong start to 2023, as stocks have been buoyed by signs that warmer-than-expected winter weather may help the region avoid an energy crisis, as well as China’s reopening, and expectations that global central bank aggressive tightening may cool off. However, the markets continue to wrestle with the ultimate implications of aggressive monetary policy tightening around the world on the global economy and financial conditions. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, discusses in his latest article, Go With the Flow, how volatility waves and changing-news tides elicit short-term market moves; economic currents tend to affect longer-term market shifts which may now favor international stocks.
In other economic news in the region, the U.K.’s public sector net borrowing rose more than anticipated in December. Germany’s consumer confidence climate declined less than predicted but remained negative, while France’s business survey unexpectedly improved somewhat. The euro was slightly higher versus the U.S. dollar, and the British pound fell. Bond yields in the Eurozone and in the U.K. declined.
The U.K. FTSE 100 Index lost 0.2%, France's CAC-40 Index and Spain's IBEX 35 Index gained 0.3%, Germany's DAX Index decreased 0.1%, Italy's FTSE MIB Index increased 0.2%, and Switzerland's Swiss Market Index was unchanged.
Asian stocks rose as volume remained light during regional holiday
Stocks in Asia continued to add to the week’s gains, but volume was lighter than usual as several markets remained closed for the Lunar New Year holiday. The widespread advances came amid several economic reports, and as optimism remained regarding China’s reopening and expectations that central banks across the globe, including the Fed in the U.S., may be set to slow down monetary policy tightening. To add to the PMI picture, Australia’s manufacturing PMI declined slightly into contraction territory, while its services PMI improved somewhat but remained contractionary. Japan’s manufacturing activity unexpectedly remained at last month’s contraction territory level, while its services PMI stayed in expansion territory and moved higher than expected. The island nation also released data on inflation, as its core CPI unexpectedly rose to 3.1% y/y, rather than remaining at the prior month’s 2.9% growth rate as expected. Additionally, Australia’s business confidence moved higher in December, but remained below zero, which indicates worsening conditions.
Optimism of China’s reopening has countered uncertainty regarding the ultimate impact of aggressive monetary policy tightening from most central banks around the world. In his article, Global Outlook: Recovery and Risk, Schwab's Jeffrey Kleintop notes how markets may continue to see volatility in 2023 as they navigate between global economic growth and inflation fears, with central banks' decreasing rate hikes and China's reopening.
Japan's Nikkei 225 Index finished 1.5% higher, with the yen rising versus the U.S. dollar. Australia's S&P/ASX 200 Index increased 0.4%, and India's S&P BSE Sensex 30 Index nudged 0.1% higher. Markets in mainland China, Hong Kong, and South Korea were closed for the holiday.
On tomorrow's international economic calendar, Japan will release its Leading Index, Australia will provide CPI data, Germany will report its IFO Business Climate Index, and PPI figures will come from Spain and the U.K.
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