EmailA sickly market got a double dose of medicine yesterday that restored its energy. Both the Dow and S&P 500 gained 1.6%, but it was the Nasdaq that sprinted out of the ICU with a 2.2% gain.
IBM's solid earnings report and outlook put a bid in things early and then the bids kept coming following reports a bipartisan Senate panel had drafted a deficit reduction plan that just might fly, enabling the U.S. to meet the August 2 deadline for raising the debt ceiling.
Nothing has been set in stone yet on the aforementioned plan. In fact, a House vote yesterday in favor of a "cut, cap and balance" plan, which isn't expected to pass the Senate and would be vetoed by the president if it did, has underscored the divisive nature of the debt ceiling negotiation process.
Nonetheless, the equity market at this time is wanting to believe in the possibility at least that the proverbial eleventh-hour solution will be reached. The overhanging question is, will an eleventh-hour solution be a combo deal where the debt ceiling is raised and a meaningful deficit reduction plan is agreed to or will it simply be a one-dimensional plan to raise the debt limit?
The answer to the last question will matter for the ratings agencies and the market, which is hoping not to be saddled with the realization that everything and nothing got settled at the same time.
The same can be said for the EU debt crisis. German Chancellor Merkel has indicated, however, that one shouldn't expect a complete solution out of tomorrow's summit, so the issue there is what solution, if any, EU leaders can get out the door for Greece that mitigates concerns about contagion risk being amplified in the near future.
As we noted on Monday, the market's prognosis is day-to-day right now and a chance of relapse is still high given the potential for policy error on either side of the Atlantic.
Fortunately, earnings have been a distracting factor in a good way. That was demonstrated yesterday by a litany of better-than-expected results and it is being demonstrated again today by another long list of positive surprises.
Apple (AAPL) is clearly at the top of the list, surpassing the Capital IQ consensus estimate by $1.95 and reporting its best quarter ever. It does not matter that Apple's guidance was "conservative." That is Apple just being Apple and the market knows that.
Shares of AAPL are trading 5% higher in pre-market action, which should give the Nasdaq an outperformance edge once again.
Other notables besting estimates include CSX Corp. (CSX), United Technologies (UTX), Cintas (CTAS), Johnson Controls (JCI), and BlackRock (BLK).
What should not be overlooked either on the reporting front is that many of the surprises have been top-line driven. Looking just at the companies named above, UTX was the "laggard," with revenues up 9.2% year-over-year. The remaining companies all saw double-digit revenue increases.
The good earnings news has provided an important measure of support for the market as key policy decisions remain in a state of flux. The S&P futures are 0.4% above fair value at this time.
As a reminder, the Existing Home Sales report for June (Briefing.com consensus 4.93 mln; prior 4.81 mln) will be released at 10:00 a.m. ET.
--Patrick J. O'Hare, Briefing.com
Patrick J. O'Hare is the Chief Market Analyst for Briefing Research, Briefing.com's institutional research service. To request a free trial please email researchsales@briefing.com.
