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Markets traded higher as the busiest week of earnings for the season helped overshadow some weakness in oil prices, sluggish economic data and uncertainty surrounding a potential government shutdown. The Nasdaq surged to all-time highs as its components, such as Alphabet (GOOGL) and Amazon (AMZN) , continued to prove the growth prospects embedded in their respective business models.
As for key items throughout the week, a welcomed result in the first round of the French presidential elections (you can read our note here) as well as a strong start to earnings sent equities surging higher in the first two trading sessions. In the middle of the week, the Trump administration announced initial details for its tax reform overhaul, which was initially met with a muted reaction, but stocks ultimately sold off to close the day on Wednesday as investors digested the potential roads ahead (more below).
Looking to next week, earnings will continue to be the driving force, as the leader of them all -- Apple (AAPL) -- reports earnings on Tuesday.
For this week, Treasury yields traded up and down, ultimately ending roughly even from where they started. The dollar was slightly weaker against the euro as expectations for the union have steadied recently following the first round of the French presidential elections. Gold was mostly lower as investors continued to bet on equities. Lastly, oil started lower for the week and leveled out before the bottom fell out on Thursday (more below). Prices rebounded slightly to close out the week.
First-quarter earnings are in full swing and have been relatively positive versus expectations, with 75.4% of companies reporting a positive EPS surprise. In the portfolio, Arconic, PepsiCo, Dow Chemical, Southwest, Comcast, Alphabet, Starbucks and Western Digital reported earnings this week.
Arconic (ARNC) reported strong first-quarter results after the closing bell, blowing away expectations on the bottom line and just edging past consensus on the top line. Revenues of $3.06 billion rose 4.5% year over year and beat consensus of $3 billion. On the bottom line, EPS of $0.33 came in 9 cents ahead of consensus expectations. The company delivered net cost savings of 1.9% of revenues (adding $61 million to the bottom line), significantly decreasing SG&A expenses (by roughly 18%) and R&D expenses (by roughly 28%) quarter over quarter. SG&A expenses, excluding the separation charges and proxy contest, were 5.6% of sales, well below industry benchmarks (S&P 500 Industrials 12%; S&P 500 A&D 10%). By segment, Engineered Products & Solutions (EP&S) revenues were up 2% on flat EBITDA year over year as strong volume growth was offset by unfavorable mix (commercial transportation down 11%) and price. Within Global Rolled Products (GRP), revenues were 43% higher in auto but were partially offset by continued destocking in the aerospace industry (impacting volumes in one of Arconic's main businesses). In Transportation and Construction Solutions (TCS), revenues were up a total of 5% year over year and EBITDA was up 13%, driven by strong cost savings.
PepsiCo (PEP) reported a top- and bottom-line beat with its first-quarter results. Revenue of $12.05 billion came in slightly above consensus of $11.98 billion and EPS of $0.94 edged out consensus by roughly $0.03.The bottom-line beat was largely driven by a lower-than-expected tax rate, explaining why some investors may view the quarter as being of lesser quality. Organic growth was up 2.1% for the quarter, which is lower than the full-year outlook of a 3% rise, but it was affected largely by the Easter holiday shift.
Dow Chemical (DOW) delivered another solid quarter, beating on the top and bottom lines by delivering growth in virtually all areas and segments and record-high operating EBITDA (+20% year over year). DOW reported revenues of $13.23 billion (up 23.6% year over year), walloping consensus of $12.46 billion, and EPS of $1.04, roughly $0.06 better than consensus. Part of the increase in sales year over year reflected the addition of Dow Corning's silicone business; without that acquisition, revenues still rose an impressive 11% year over year. DOW has now delivered an astounding 18 straight quarters (4.5 years) of year-over-year operating earnings growth and margin expansion (thanks in part to the completion of the two-year cost synergy program of the Dow Corning integration in just 10 months). Even more impressive, volumes have grown for 14 straight quarters in what has been a challenged global economic environment.
Southwest Airlines (LUV) reported a softer-than-expected first quarter, with revenues of $4.88 billion missing consensus of $4.92 billion, and earnings per share of $0.61 failing to meet consensus of $0.63. Total unit revenues (equal to RASM) decreased 2.8% in the quarter, falling in line with the company's guidance for a 2%-3% decline (recall that this was the result of a downward revision midquarter; initial expectations were for flat to down 1%). Overall passenger revenue increased 0.6% in the quarter, but this was largely due to a 4.1% rise in capacity as passenger unit revenues declined 3.3% for the quarter.
Comcast (CMCSA) reported another strong quarter, delivering a top- and bottom-line beat and highlighting the power of its diversified business model. The company reported first-quarter revenues of $20.5 billion (up 9% year over year), which beat consensus of $20.12 billion, and EPS of $0.53, which squashed consensus of $0.44. As for the business segments, cable communications revenue came in roughly in line as strength in subscriber additions was offset by weaker advertising and business revenue, which increased 13.6% year over year but slightly missed consensus. Moving on to NBC Universal, revenues of $7.87 billion came in better than consensus of $7.45 billion. Cable revenues and film revenues both beat consensus expectations while parks revenues came in roughly in line (but up a strong 9% year over year).
Alphabet (GOOGL) reported revenues of $24.75 billion (up 22% year over year or 24% in constant currency), beating consensus expectations by roughly $500 million, and EPS of $7.73, which walloped consensus of $7.40. Google properties' (formerly labeled "websites"; in other words, the core business) revenues grew 21% year over year to $17.4 billion, beating consensus estimates of $17 billion and accelerating year-over-year growth compared to the prior quarter. Google ad revenue rose 19% year over year to $21.4 billion, also accelerating year-over-year growth compared to the prior quarter. Google Other revenue, which includes Pixel sales, Cloud services and Google Play, grew 49% to $3.1 billion, also beating consensus estimates. The Other Bets reporting segment, which covers businesses such as Waymo, Google Fiber, Nest and Verily, had an $855 million operating loss (up from $774 million in the year-ago quarter) on revenue of $244 million (up from $165 million in the year-ago quarter), matching consensus.
Starbucks (SBUX) delivered EPS of $0.45, matching consensus, and revenues of $5.3 billion, missing consensus of $5.4 billion. Digging deeper into the quarter, global comparable store sales increased 3% year over year, lower than consensus of 3.6%. The China Asia Pacific (CAP) region delivered +3% same-store sales growth as well, slightly missing consensus. That being said, China comp store sales increased 7% in the quarter, driven by a 6% increase in transactions. U.S. comps were only +3% year over year, missing that coveted +5% mark eyed by investors.
Western Digital (WDC) delivered a top- and bottom-line beat with its fiscal-third-quarter results. Revenues of $4.65 billion (up 64.7% year over year, reflecting the SanDisk acquisition) beat consensus of $4.57 billion and EPS of $2.39 smashed consensus of $2.14. The strong results were driven by strength in the NAND business despite slight HDD weakness. The ongoing NAND supply shortage helped drive ex-HDD revenues of $2.2 billion, beating consensus expectations for only $1.9 billion. HDD revenues of $2.5 billion came in slightly under expectations, but this was largely expected following Seagate's (STX) weaker results and continued weakness in the enterprise business. Importantly, units were the culprit of the miss (mostly in enterprise and notebooks) while average selling prices were in line, an indication that WDC could maintain pricing power.
On the economic front, earnings largely took the excitement out of the macro data, but we still received some important data points to help inform our view of the domestic economy moving forward.
On Tuesday, the Commerce Department reported that new home sales rose to an annually adjusted rate of 621,000, blowing past estimates of 583,000 and reaching the highest levels since July 2016 (second-highest since 2008). The 5.8% month-over-month increase was a welcomed surprise compared to expectations for a slight decline, although we note that February's figures were revised slightly downward. New home sales are now up 15.6% since March 2016 and have increased for the third straight month. Importantly, the strong March number builds off last week's existing home sales report, which showed a 4.4% jump to a 10-year high.
Digging a bit deeper, new home sales rose 25.8% in the Northeast on a month-over-month basis, followed by a 16.7% rise in the West and a 1.6% rise in the South. The Midwest was the only region to show a decline month over month of 4.5%. The median sales price of new homes sold in March was $315,000 (up 1.2% year over year) and the average price was $388,200. At the end of March, for-sale inventory sat at a seasonally adjusted 268,000, representing about a 5.2-month supply given current sales rates. Recall that tight supply (six months is viewed as balanced) has been a lingering issue in the housing market as prices have continued to rise, although new home sales have benefited somewhat compared to existing home sales, where the supply is relatively tighter.
On Wednesday, the White House announced for the first time an outline for its tax reform overhaul. Ultimately, many questions remain unanswered, but the administration appears hell-bent on getting tax reform passed by the end of the year. Before that can happen, the details will need to be hashed out further. Tax reform, from an investment perspective, would create a wealth of opportunities for individual investors (both from a corporate perspective as companies make more money and from the individual perspective as investors themselves will have more money). But we cannot count on anything being passed given how difficult we know it can be for policies of this nature to gain approval. You can read our detailed note on the announcement here.
On Thursday, the Department of Labor reported that initial jobless claims for the week ending April 22 were 257,000, a 14,000-claim increase from the prior week's revised numbers and 12,000 claims higher than the market's expectations. Still, the overall trend remains strong and we note that data tend to be volatile around this time period due to the Easter holiday. As a reminder, the government updated jobless claims in the prior report, going back five years, as it does annually, to consider more accurate seasonal adjustments. The updates show that layoffs have remained extremely low but were a bit higher than previously reported, mostly when considering data from 2016. Claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for an astounding 85 straight weeks (compared with 112 weeks under the older seasonal-adjustment process, according to the updated data), the longest streak since 1970. The four-week moving average for claims (used as a gauge to offset volatility in the weekly numbers) fell by 500 to 242,250 last week. The consistent strength throughout the month or so is perhaps a signal that March's relatively weak jobs report was an aberration as opposed to the beginning of a new trend. We will get the final verdict next week along with the April jobs report on May 5.
Also on Thursday, the National Association of Retailers reported that pending home sales in March fell 0.8% to 111.4, dropping more than the estimated 0.5% decline. Recall that the pending home sales number represents contracts signed for existing homes for sale that will close in one to two months. The reading comes off the heels of a 5.5% increase in February. Despite the decline month over month, March was the third-strongest month for pending home sales in the past year. On a year-over-year basis, pending home sales are up 0.8%.
Partly impacting the reading for March is the lack of supply, which, as we've pointed out, continues to be an issue in the overall housing market and is causing upward pressure on the price of homes (42% of homes sold in March ended up coming off the market at prices above their original listing price). Digging a bit deeper, the South was the only region to show an increase in pending home sales for the month, up 1.2%. Leading the decline were the Northeast and Western regions, both of which fell 2.9%; the Midwest also showed a decline of 1.2%. On a year-over-year basis, the South is up 3.9% and the Northeast is up 1.8%; the Midwest is down 2.4% and the West is down 2.7%.
On Friday, the Commerce Department reported that the first reading on first-quarter GDP was 0.7%, missing consensus estimates of between 1% and 1.2%. This comes on the heels of 2.1% in the fourth quarter of 2016. Recall that GDP is our gauge for economic growth. We note that the first quarter is seasonally the weakest quarter for growth, but the sluggish performance this year marks the slowest quarterly growth in three years.
Weighing down the index was consumer spending (the largest component of GDP), which rose a disappointing 0.3% in the first quarter, after rising 3.5% in last year's fourth quarter. This marks the lowest levels since 2009 thanks to weak auto sales and a lower spend on energy due to less heating requirements due to the unseasonably warm weather in recent months. Consumer spending is a key metric given that it represents roughly two-thirds of our economic output. Trade numbers showed that exports rose 5.8%, while imports rose 4.1% -- exports add to GDP while imports detract from it.
As we've mentioned, the Commerce Department releases quarterly GDP numbers three times as new data are evaluated, allowing for a more accurate reading each time. The next reading will be released on May 26.
On the commodity front, oil prices trended lower for the week despite a relief rally in the middle of the week ahead of and immediately after the closely watched stockpile data. Crude had declined for six straight sessions before the slight uptick.
The Energy Information Administration (EIA) reported on Wednesday that U.S. commercial crude inventories fell by 3.6 million barrels to a total of 528.7 million barrels in the week through April 21, a steeper drop than the expected draw of roughly 1.8 million barrels (bullish for crude). That being said, product inventory data were bearish as gasoline surged 3.4 million barrels, outpacing the 500,000-barrel expected increase. Distillates also grew by 2.7 million barrels, defying the 1-million-barrel projected draw. Other products rose 4.1 million barrels. This data were not the focus initially following the report, but the bears ultimately highlighted these weaker spots on Thursday when crude broke down on the confluence of several factors, including a strong dollar and a restart of production in Libya. For more on oil this week, we encourage members to read our detailed analysis here.
Moving on to the broader market, as we mentioned, first-quarter earnings are in full swing and have been largely positive compared to estimates. Total first-quarter earnings growth is up roughly 11.7% year over year; of the 200 non-financials that reported, earnings growth is 9.4% versus expectations for an overall 11% increase throughout the season. Revenues are up 5.5% versus expectations throughout the season for a 7.03% increase; 75.4% of companies beat EPS expectations, 18.4% missed the mark and 6.2% were in line with consensus. On a year-over-year comparison basis, 75% beat the prior year's EPS results, 22.1% came up short and 2.9% were virtually in line. Materials, consumer discretionary and health care have had the strongest performance to kick off the year versus estimates, whereas real estate and telecom have posted the worst results in the S&P 500.
