Stocks dribbled lower on Tuesday in response to some softness in earnings and the economic data. Overall, the action continued to be subdued ahead of earnings from Apple Inc (NASDAQ:AAPL) and Twitter Inc. (NYSE:TWTR) after the close as well as Wednesday’s Federal Reserve policy announcement.
In the end, the Dow Jones Industrial Average lost 0.2%, the S&P 500 Index dropped 0.3%, the Nasdaq Composite shed 0.1% and the Russell 2000 finished 1.2% lower. Treasury bonds were stronger while the dollar was mixed. Gold ended unchanged while crude oil was under pressure again, dropping 1.7% to close at $43.24 a barrel.
Energy stocks underperformed, losing 1.2% as a group. Transports were also hit, losing 2.6%, after trucking stocks sold off on negative earnings preannounced by Roadrunner Transportation Systems, Inc. (NYSE:RRTS). Meanwhile, International Business Machines Corp. (NYSE:IBM) dropped 4% on news of an SEC accounting investigation into the company’s revenue recognition.
Big Pharma lifted healthcare stocks, with Merck & Co, Inc. (NYSE:MRK) rising 1.1% and Pfizer, Inc. (NYSE:PFE) up 2.4%. Elsewhere, Rite Aid Corporation (NYSE:RAD) surged 42.6% on news that it is in advanced talked to be acquired by Walgreens Boots Alliance, Inc. (NASDAQ:WBA) in a $10 billion deal that would unite the country’s second- and third-largest drugstores.
The Biotech iShares ETF (NASDAQ:IBB) gained 3.2% to punch up and out of its two-month trading range to challenge its 50-day moving average. A breakout here would put an end to the post-July downtrend — driven by political pressure against high drug prices — and boost an area that been a favorite of momentum chasers.
On the economic front, core capital goods orders fell 0.3% month-over-month in September, missing expectations for a 0.2% increase. August orders were revised down 0.8% to a 1.6% decline. Separately, the Conference Board’s consumer confidence index declined to 97.6 in October from a downwardly revised 102.6 in September. This was well under the 103 consensus and is the weakest reading since May on job market softness.
Tomorrow’s big event will be the Fed policy statement, which isn’t expected to feature an interest rate hike (futures odds are around 4% that liftoff will happen now) but will be closely watched for clues on the potential for a tightening move in December.
The most likely outcome will be an acknowledgement of recent economic weakness and global downside risks, which will remove the threat of a 2015 rate hike and more closely align Fed expectations with where the futures market is (which doesn’t expect rate liftoff until March 2016 at the earliest).
Economists at Bank of America Merrill Lynch note that while things aren’t as scary as they were back in September, thanks to efforts by the People’s Bank of China and the European Central Bank, recent U.S. data has been mixed.
Turning to earnings, AAPL reported a top- and bottom-line beat with earnings of $1.96 per share (vs. the $1.88 expected) on revenues of $51.5 billion (vs. $50.8 billion expected). Gross margins expanded to 39.9% vs. 38% last year.
Now for the details.
iPhone and Mac shipments were largely in line with expectations at 48 million (vs. 39.3 million last year) and 5.7 million (vs. 5.52 million last year), respectively. But iPad shipments were soft at 9.88 million vs. 12.3 million last year and the 10.5 million that were expected. Clearly, the iPhone 6s and 6s Plus is cannibalizing some sales.
China revenue was good but not as good as expected: Revenue came in at $12.5 billion vs. $6.3 billion last year and $13.2 billion last quarter. The company, which has 25 stores in the Middle Kingdom now, is expanding its presence with a new store opening almost every month according to management.
Forward guidance was solid. And the company’s cash pile grew to a record $206 billion. After returning $17 billion to investors via share repurchases and dividends, AAPL has completed more than $143 billion of its $200 billion capital return program.
Investors cheered the news, pushing shares up 1.5%. Edge Pro subscribers are enjoying a near 30% gain in their November $115 AAPL calls.
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.
