US stocks paused this week following a stream of corporate earnings that were solid enough to maintain the year’s gains, but not quite good enough to push the rally forward.
The Dow Jones Industrial Average and S&P 500 bolted to new records on Tuesday ahead of a decision by the US Federal Reserve to keep an aggressive monetary stimulus program going. However, all three indices cooled on two of three subsequent days, resulting in a mixed performance for the week.
The Dow advanced 45.27 points (0.29 percent) to 15,615.55. The broad-based S&P 500 edged 1.87 points (0.11 percent) higher to 1,761.64, while the tech-rich NASDAQ Composite Index fell 21.32 points (0.54 percent) to 3,922.04.
As the last big week of third quarter’s earnings played out, the pattern of solid, but unspectacular earnings continued. Several large companies reported big declines in earnings, yet still exceeded expectations.
“Earnings seem to be driving the market and earnings are pretty good,” said Anthony Conroy, head of global trading trader at BNY Convergex Group.
Third-quarter earnings for the S&P 500 are now projected to have grown 5.2 percent compared with last year, S&P Capital IQ said.
Pharmaceutical giant Pfizer bested analysts’ forecasts for earnings even as revenues slightly underperformed and overall company profit dipped 19 percent on lower sales. Pfizer is contending with diminished sales due to the patent expiration of drug blockbusters such as cholesterol drug Lipitor and erectile dysfunction drug Viagra. However, investors pushed Pfizer shares up 1.7 percent on Tuesday on higher sales from products like nerve and muscle drug Lyrica and progress on a pipeline of other drugs.
Exxon saw profit decline 18 percent due to a huge deterioration in its refining business, but its earnings still bested analysts’ expectations by US$0.02 at US$1.79 per share, as the company snapped a losing streak of oil and gas production declines. General Motors (GM) earnings fell 53 percent due to higher taxes and equity buybacks. Without these one-time items, GM profits exceeded forecasts of US$0.93 per share by US$0.03.
“We made gains in the third quarter, as we improved our North American margins and increased our global share on the strength of our Chevrolet brand,” GM chief executive Dan Akerson said.
GM also closed the week on a high, reporting that US sales last month rose 16 percent. In contrast, Apple and Facebook both finished the week lower even as they bested forecasts earnings. Analysts worried that Apple’s guidance suggested lower profit margins in the fourth quarter, while Facebook’s comments about a decline in interest among younger teens generated concern.
“The kids are Facebook’s seed corn, and you don’t want to lose that,” Silicon Valley analyst Rob Enderle said.
Other problematic earnings came from insurer AIG, which acknowledged that a large planned divestiture of its aircraft leasing business could fall through; Western Union, which said profits would be hit by higher regulatory compliance costs; and Avon, which warned of a penalty in a longstanding foreign bribery probe that was “significantly greater” than hoped. All three companies fell precipitously after announcing their earnings.
Stocks were lifted in the first half of the week as investors looked ahead to Wednesday’s meeting of the Federal Open Market Committee, which, as expected decided to keep an US$85 billion per-month bond-buying program going due to continued concern about the economic recovery.
However, the markets ran out of steam after that.
Investors will continue to assess economic data through the lens of the Fed’s plans on tapering the stimulus program. Next week’s schedule includes last month’s jobs report and the first estimate of third-quarter economic growth.
The Fed will be closely looking at the jobs data to determine whether the partial government shutdown “had a long-term effect, or if it’s just going to cause blip during the month of October,” Kenjol Capital Management portfolio manager David Levy said.
“The result will affect the Fed and their policy,” he said.