Summer Somnambulance. The Dow Jones Industrial Average is trading down just 0.01% on Monday morning, while other indexes are basically flat. There are still plenty of newsworthy catalysts on the horizon, including China's doubling down on its tariff stance, and surging corporate profits near their highest level since the recession. In today's Morning Movers, we...
•...examine the lethargic market; •...gander at what could spell trouble ahead ; •...and give a nod to Jacobs Engineering's (JEC) strong earnings.
The Dow Jones Industrial Average futures are down three points, or 0.01%, while the S&P 500 and the Nasdaq Composite are both flat in recent trading.
As we noted earlier this morning, there's plenty of news that the market could be reacting to, including China digging in its heels on trade...but it's not. The fact that trade threats seem to have little impact on U.S. markets these days may bolster the White House's case that it's in China's best interest to come to the table, says Tigress Financial's Ivan Feinseth, as China has more to lose in a trade war with the U.S. Perhaps investors are also hoping for another eleventh-hour peace declaration, as happened with Europe.
For its part, Morgan Stanley is little concerned about tariffs' effect on inflation. In a recent note authored by Jeremy Nalewaik, the firm folds in the tariffs that have already been enacted, along with a number of other factors that could push up prices, including higher jet fuel prices and the recent Supreme Court decision that requires online merchants to collect sales tax. He comes to the conclusion that the net effects of these developments "leaves our core inflation projection basically unchanged." He expects personal consumption expenditure inflation at 2% by the end of this year, in line with the Federal Reserve's expectations.
Still, that doesn't mean that's it's time for everyone to pack up and head to the beach worry free, as much as we'd like to. Valuations remain a bugaboo, contends the Leuthold Group's Jim Paulsen. He notes that the S&P 500's trailing price-to-earnings multiple is now higher than 84% of the time since 1950. This high P/E profile has curtailed the index's future return profile, on a historical base. Yet it doesn't necessarily mean significant downside risk, as, since 1950, markets with P/E multiples at or higher than the current one have averaged have annualized one-month forward total return of 4.5%.
That doesn't sound so bad. But Paulsen warns that the less followed metric, the average intra-market return correlation, has proven a more accurate demarcation between periods of good and bad stock market performance in the past. "Recently, correlation within the stock market has fallen to one of its lowest levels of the entire post-war era, and the combination of low correlation with a high P/E valuation has historically suggested significant downside risk," Paulsen explains.
Research Affiliates' Vitali Kalesnik concurs, writing that investors shouldn't get too complacent, and be aware of signals that could signal a downturn. "Market signals are implying a number of developed markets-notably, Japan, the United States, and Germany-are now entering the correction phase of the business cycle. Trade wars, Brexit, debt issues in Italy and Spain, and political problems in Germany and Italy can make the road ahead a lot bumpier than the road we have grown accustomed to," he writes.
Can earnings keep doing all the heavy lifting to keep the market above these worries? We finally past peak second-quarter earnings season last week, but there are still plenty of reports due out this week. Stay tuned.
Earnings & News
bluebird bio (BLUE) is up 4.3% to $156.50 after Regeneron Pharmaceuticals (REGN), up 0.4% to$396.50, said it would make a $100 million investment in the biotech's stock at $238.10 a share.
Jacobs Engineering (JEC) is up 6.8% to $71.65 after reporting third-quarter earnings. The construction services firm earned $1.35 a share on revenue of $4.16 billion. Analysts were looking for earnings of $1.21 on revenue of $4 billion. For the full year, it expects to earn toward the high end of its $4 to $4.40 EPS range, compared with the $4.25 consensus estimate.
Newell Rubbermaid Brands (NWL) is up 2.3% to $27.19 after reporting second-quarter earnings. The consumer products maker earned 82 cents a share on revenue of $2.2 billion. Analyst were looking for earnings of 78 cents a share on revenue of $3.83 billion. For the full year, it sees EPS of $2.45 to $2.65, compared with the $2.59 consensus estimate.
Sempra Energy (SRE) is down 1.5% t o $115 after reporting second-quarter earnings. The utility earned $1.35 a share on revenue of $2.56 billion. Analysts were looking for earnings of $1.18 on revenue of $2.64 billion.
Sotheby's (BID) is down 7.4% to $49 after reporting second-quarter earnings. The auctioneer earned $1.09 a share on revenue of $345.6 million. Analysts were looking for earnings of $1.55 on revenue of $330.28 million.
Upgrades & Downgrades
Barrick Gold (ABX) is down 1% to $10.99 after Jefferies downgraded it to Hold.
CNX Resources (CNX) is down 0.8% t0 $15.83 after Raymond James downgraded it to Underperform.
Devon Energy (DVN) is up 0.6% to $43.30 after UBS upgraded it to Buy.
Intel (INTC) is down 1.6% to $48.86 after Barclays downgraded it to Overweight.
Intercept Pharmaceuticals (ICPT) is up 6.2% to $103.25 after Goldman Sachs upgraded it to Buy.
Qualcomm (QCOM) is up 1.6% to $66.45 after Cowen & Co. upgraded it to Outperform.
Sage Therapeutics (SAGE) is up 1% to $147.20 after Piper Jaffray initiated coverage with an Overweight rating.
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