The major indices are expected to start today's session on a higher note and there is no mystery behind why that is. Apple (AAPL) impressed with its fiscal third quarter report last night and is trading 6.5% higher in pre-market action.
That's a huge move for a stock with a market capitalization close to $800 billion and it certainly has a positive impact on market-cap weighted indices like the S&P 500 and Nasdaq Composite. It helps the price-weighted Dow Jones Industrial Average, too, considering AAPL is the sixth-highest priced stock there.
In any event, the thrust of the early gains will be felt mostly in the Nasdaq Composite, which will be good for holders of the PowerShares QQQ Trust (QQQ). The Nasdaq 100 futures are up 44 points and are trading 0.7% above fair value.
The blue-chip averages will be riding those coattails, but they will be doing so with a little less vigor. The S&P futures are trading only a smidgen above fair value while the Dow Jones Industrial Average futures are trading 0.2% above fair value.
It's an interesting disposition, because one might have thought Apple would have a more pronounced effect on investor sentiment based on the move it is making.
The fact of the matter, though, is that the broader market has had a pretty measured response thus far to what has been an indisputably good earnings reporting period highlighted by a notable pickup in revenue growth and more quality earnings beats.
To wit, FactSet informs us that the second quarter blended EPS growth rate for the S&P 500 has increased to 9.7%, versus 6.6% at the start of the reporting period, and that the blended revenue growth rate has risen to 5.1% versus 4.9% at the start of the reporting period. The S&P 500, however, is up just 0.7% since JPMorgan Chase (JPM) reported its results on July 14.
For most investors, a gain is certainly better than a loss, yet the modest nature of the gain in the wake of fundamentally good news hints at some reservations about equity valuations being stretched and the good news having been priced in to a large extent ahead of the reports.
At its current level, the S&P 500 trades at 19.3x trailing twelve-month earnings, which is a 25% premium to its 10-year historical average of 15.5x.
Valuation concerns are not new of course. They have been debated for some time and they have been rebutted time and again by the persistence of low interest rates, which have provided an essential source of support.
The yield on the 10-yr note is up two basis points this morning to 2.28%, but another fact of the matter is that the yield on the 10-yr note started the year at 2.48%. In short, long-term rates have come down big while earnings growth has gone up big and that has been effective combination for the continuation of this bull market.
The ADP Employment Change Report for July hasn't affected the bullish tone. The headline for July was a bit weaker than expected with an estimated 178,000 positions added to private sector payrolls (Briefing.com consensus 187,000), yet that was more than offset by the upward revision to June from 158,000 to 191,000.
This report will serve to solidify the market's nonfarm private payroll expectations (Briefing.com consensus 175,000) for the July Employment Situation Report, which will be released on Friday.
So, this morning's story line for the stock market remains much the same: strong earnings growth and low interest rates continue to provide support and a fundamental diversion for the market in the face of the political drama unfolding in Washington.