U.S. equities chopped around the unchanged line on Tuesday as traders awaited big earnings releases — Apple Inc. (NASDAQ:AAPL) reported after the close — and the Federal Reserve policy decision on Wednesday morning.
The tape was heavy, however, amid ongoing disappointment with apparent efforts out of Japan to walk back inflated expectations for a new, coordinated monetary/fiscal policy push. The result was a rise in the yen and a 1.4% drop in the Nikkei Average.
In the end, the Dow Jones Industrial Average lost 0.1%, the S&P 500 Index gained a fraction, the Nasdaq Composite gained 0.2% and the Russell 2000 gained 0.6%. Treasury bonds were stronger, the dollar was down sharply against the yen (bad for carry trades), gold gained 0.1% and oil fell 0.5% before dumping further in after-hours trading on a larger-than-expected inventory build.
On the economic front, June housing data surprised to the upside with a 3.5% month-over-month increase in new home sales — reaching the highest level since February 2008. Prices fell slightly, however. And the Markit services activity index fell to a five-month low.
Restaurant stocks were hit hard, with McDonald’s Corporation (NYSE:MCD) down 4.5% on a slowdown in Q2 comp-store sales growth from recent trends. After the close, Buffalo Wild Wings (NASDAQ:BWLD) reported mixed results, with earnings beating estimates but revenues missing while Panera Bread Co (NASDAQ:PNRA) rising 4.5% in extended trading on a top- and bottom-line beat.
In other earnings news, Gilead Sciences, Inc. (NASDAQ:GILD) lost 8.5% on weak sales guidance. 3M Co (NYSE:MMM) lost 1.1% on lowered fiscal year guidance. United Technologies Corporation (NYSE:UTX) gained 3.1% on a 8% earnings beat.
Texas Instruments Incorporated (NASDAQ:TXN) gained 7.9% on a top- and bottom-line beat combined with positive guidance. Caterpillar Inc. (NYSE:CAT) gained 5.2% on an earnings beat driven by revenue upside. And JetBlue Airways Corporation (NASDAQ:JBLU) gained 8% on profitability improvements.
Autonomous driving favorite Mobileye NV (NASDAQ:MBLY), a maker of vision systems, fell 8.1% on solid earnings tainted by word the company’s relationship with Tesla Motors Inc (NASDAQ:TSLA) was ending.
After the close, Twitter Inc (NYSE:TWTR) fell 9.4% after reporting weak revenue and issuing soft forward guidance as user growth remains tepid.
AAPL surged more than 7% on a top- and bottom-line beat, despite the second consecutive quarter of falling profitability and sales as well as guidance suggesting the weakness would continue into the third quarter as iPhone demand wanes (down 15% year-over-year).
Sales in China were also soft, where the company is the target of some anti-American sentiment related to the geopolitical tensions in the South China Sea. Sales totaled $8.8 billion there vs. $13.2 billion last year and $12.5 billion last quarter.
Looking ahead, all eyes are on the Fed’s policy statement tomorrow afternoon. No change to interest rates are expected, but watch for the statement’s verdict on the balance of risks to the economy to move the odds of a September rate hike. As a reminder, the Fed’s last “dot plot” of interest rates estimates in June continued to pencil in two quarter-point rate hikes this year, down from four quarter point hikes at the start of the year.
If Fed policymakers — mindful of the Brexit non-event and ongoing strength in the labor and housing markets (inflationary) — are going to stick to this forecast, they will need to prepare the market for a September hike. The July policy statement will need to reflect this reality.
The main casualty of a more hawkish Federal Reserve will be oil and energy stocks, which are reeling from return of supply-demand headwinds amid bloated inventories in both gasoline and crude.
The Aug $94 Exxon Mobil Corporation (NYSE:XOM) puts recommended to Edge Pro subscribers are up more than 55% so far as the energy heavyweight looks ready to break its oh-so-perfect uptrend out of the February low that was driven by repeated hints of an OPEC-Russia supply freeze deal that never came to fruition.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.
