Dow Struggles at 18,000 as Earnings Weigh

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Stocks mostly moved lower on Tuesday, giving back some of the gains earned in Monday’s big rebound and continuing the market’s long listless spell. Large-cap stocks are trading at levels first hit in early December as a long list of concerns — from the specter of Federal Reserve rate hikes to a drop in corporate profitability and a string of disappointing economic data — has weighed on sentiment.

In the end, the Dow Jones Industrial Average lost 0.5%, the S&P 500 lost 0.2%, the Nasdaq Composite gained 0.4%, and the Russell 2000 lost 0.1%.

dow jones industrial average

Crude oil dropped 2.2% to close at $56.63 on reports Saudi Arabia was ending its bombing campaign against rebels in Yemen. That hit energy stocks hard, pushing the sector down a little more than 1%. Oil was down again after hours on a larger-than-expected API inventory build.

Healthcare stocks led the way with a 0.7% thanks to a move in biotech names like Gilead Sciences, Inc. (NASDAQ:GILD), which gained 4.5% on comments from Bernstein analysts that it should acquire Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), as well as chatter that Bill Ackman of Pershing Square is accumulated a $2 billion position. Generic drug maker Teva Pharmaceuticals Industries Ltd (ADR) (NYSE:TEVA) also made an unsolicited offer for Mylan NV (NASDAQ:MYL) worth about $40 billion.

In earnings news, Kimberly-Clark Corp (NYSE:KMB) gained 5.4% on organic sales growth of 5%. Harley-Davidson Inc (NYSE:HOG) lost 9.8% on light retail sales, pushing shipments to the lower end of guidance.

The reason the lift seems to have been sucked out of this market is that valuations have grown expensive as earnings growth has slowed. Capital Economics notes that aggregate operating profit margins for companies in the S&P 500 fell from a record high of 10.1% in the third quarter of 2014 to 9.0% in the fourth quarter. A further slide is expected if the dollar remains strong and the U.S. job market keeps tightening.

What we need to see is the tighter job market translating into wage gains and higher retail sales. There is early evidence of this already, but we need more.

Near-term, the most likely catalyst to break the market out of its funk would be a pushback in the Federal Reserve’s rate liftoff timing until later this year — bringing it into alignment with where the futures market is given the slowdown in GDP growth and soft inflation. The next Fed policy announcement is April 29.

For now, I’m recommending investors focus on areas of movement such as tech stocks on anticipation of a rebound in PC demand later this year when Windows 10 is released. This should benefit stocks like Microsoft Corporation (NASDAQ:MSFT) — which looks set to emerge from a six-month downtrend — as well as semiconductor names.

MSFT stock

I’ve recommended the May $43 MSFT calls to my Edge Pro subscribers.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/04/dow-jones-struggles-at-18000-as-earnings-weigh/.

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