Market Perspective for July 25, 2016

Domestic equities will attempt to sustain the past month’s gains as this week’s Federal Reserve meeting approaches. The S&P 500 index reached a new all-time high last week and earnings continue to indicate economic stability in most sectors. Global interest rates continue to hover at near-record lows as monetary easing in China, Japan and Europe pushes global investors to the U.S. in search of yield.

The Federal Reserve is expected to keep interest rates unchanged between 0.25 and 0.50 percent at this week’s meeting. Most economists believe the Fed will hold off on raising rates until at least December, despite strong economic growth, job reports and housing data. Inflation is also approaching the central bank’s 2 percent target, but the Fed is likely to justify rate delays by highlighting the recent backslide in oil prices.

The flash PMI for July will be out on Tuesday. The U.S. report is key, but the United Kingdom’s could illuminate any Brexit-induced economic impact. New home sales for June and the Case-Shiller home price index for May will also be available on Tuesday, while June durable goods orders, capital goods orders and pending home sales will be released on Wednesday. Oil inventory data will also be out on Wednesday, though those numbers will be overshadowed by rising gasoline inventories.

The widely anticipated second quarter GDP will be reported on Friday. Economists currently expect 2.6 percent growth while the Atlanta Fed’s GDP Now model predicts 2.4 percent. GDP growth was 1.1 percent in the first quarter.

75 of the 120 S&P 500 companies that have reported have exceeded earnings expectations. Potential market-movers reporting this week include Google parent Alphabet (GOOG), Apple (AAPL) and Facebook (FB) as well as overseas oil giants British Petroleum (BP) and Royal Dutch Shell (RDS.A). In addition to AAPL, other Dow components reporting include Boeing (BA), Caterpillar (CAT), Coca-Cola (KO), McDonald’s (MCD) and Verizon (VZ). Apple’s average forecast calls for a 25 percent drop in earnings. Diminishing consumer interest in the iPhone and increasing pressure from competitors have  led to declines and may persist until the release of the tenth anniversary iPhone slated for 2017.  A beat by Apple would be very good news for both the sector and S&P 500 earnings growth.

Verizon completed a deal to buy Yahoo (YHOO) for $4.8 billion over the weekend, despite the firm having a market cap of almost $40 billion. Yahoo’s remaining value lies its investments in other companies, such as Alibaba (BABA). Yahoo opted to dump its core business due to the inability to execute a tax-free BABA spinoff.

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