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Dow 30 Stock Roundup: MSFT, JPM, IBM, JNJ, GS Earnings Impress

Swarup Gupta

The Dow endured a volatile week, primarily due to renewed trade tensions, after gaining strongly earlier this month. President Trump remained skeptical about a near-term solution to the long-running U.S.-China trade war. However, hopes that the Federal Reserve would adopt a markedly dovish stance at the first sign of economic weakness helped broader markets rebound toward the end of the week.

Last Week’s Performance

The index surged 0.9% last Friday following dovish signals from Fed Chair Jerome Powell, hinting at a rate cut in July. Powell reiterated Fed’s commitment to act as appropriate to sustain the U.S. economic expansion.

Economists believe this this is a clear indication of an imminent rate cut, possibly after the upcoming FOMC meeting scheduled on Jul 30-31. Meanwhile, investors cautiously awaited the second-quarter 2019 earnings season, which will kick off this week.

The index gained 1.5% over last week. Strong indications from Powell that a rate cut was likely in July significantly raised investors’ confidence in risky assets like equities. Market participants broadly believe that a reduction in rates will act as cushion for U.S. stocks in case of a decline in second-quarter earnings.

The Dow This Week

The index gained 0.1% on Monday buoyed by hopes of a Fed rate cut later this month. Moreover, the prospect of fresh trade negotiations between the United States and China also boosted investor sentiment. However, market participants remained cautious and were closely monitoring second-quarter 2019 earnings results.

The index fell 0.1% on Tuesday after President Donald Trump expressed his doubts about a near-term solution to the lingering trade battle between the United States and China. Meanwhile, major banks reported sold second-quarter results although investors remained cautious about the possibility of an overall decline in earnings during the second quarter.

The index declined 0.4% on Wednesday on renewed trade tensions. On Jul 17, The Wall Street Journal reported that no progress has been made on the trade front between the United States and China since the two presidents, Donald Trump and Xi Jinping, met last at the G-20 summit on May 30 in Japan. Moreover, mixed second-quarter earnings results dented investors’ confidence.

The index rebounded on Wednesday, inching up 0.01%. However, broader markets moved significantly higher following indications that the Federal Reserve would adopt a markedly dovish stance going forward.

The recovery began in the afternoon after New York Federal Reserve President John William stated that the Fed needs to “act quickly” if it became clear that the economy was losing momentum at a time when interest rates remain low.

Components Moving the Index

Microsoft Corporation MSFT reported fiscal fourth-quarter earnings of $1.37 per share, beating the Zacks Consensus Estimate of $1.21. This compares to earnings of $1.07 per share a year ago. These figures are adjusted for non-recurring items.

This quarterly report represents an earnings surprise of 13.22%. A quarter ago, it was expected that this software maker would post earnings of $1 per share when it actually produced earnings of $1.14, delivering a surprise of 14%.

Over the last four quarters, the company has surpassed consensus EPS estimates four times.

Zacks Rank #2 (Buy) Microsoft posted revenues of $33.72 billion for the quarter ended June 2019, surpassing the Zacks Consensus Estimate by 3.01%. This compares to year-ago revenues of $30.09 billion. Microsoft shares have added about 34.3% since the beginning of the year versus the S&P 500's gain of 17.6%. (Read: Microsoft Q4 Earnings and Revenues Surpass Estimates)

Microsoft’s intelligent cloud space, Azure, outperformed expectations with $11.4 billion for the quarter, helping what CEO Satya Nadella called a “record full year for Microsoft.” Gross margins came in at 69%, ahead of the 67% anticipated. The company also credited gains in Windows, Office, XBox Live and LinkedIn, to name just a few. Commercial cloud revenue came in up 39% year over year. (Read: Microsoft Beats on Strong Azure Numbers)

JPMorgan Chase & Co.’s JPM second-quarter 2019 adjusted earnings of $2.59 outpaced the Zacks Consensus Estimate of $2.50 on the back of modest loan growth and higher mortgage banking fees. Results exclude income tax benefits of $768 million or 23 cents per share. Including this, earnings were $2.82 per share.

However, shares of Zacks Rank #3 JPMorgan fell 1.6% in pre-market trading, as management revealed a dismal lending scenario expectation for the second half of the year. Management now expects net interest income (NII) to be roughly $57.5 billion, down from the prior guidance of more than $58 billion.

Net revenues as reported were $28.8 billion, up 4% from the year-ago quarter. Rising rates and growth in balance sheet were the main reasons for the improvement.

These positives were partially offset by lower Markets revenues, investment banking fees and mortgage banking fees. Also, the top line beat the Zacks Consensus Estimate of $28.4 billion. (Read: JPMorgan Q2 Earnings Top, Stock Down on Dismal Outlook)

Merck & Co., Inc. MRK recently announced that the FDA has approved its new combination antibacterial injection, MK-7655A, which is a fixed combination of relebactam and imipenem/cilastatin.

The medicine, to be marketed by the trade name of  Recarbrio, is approved for the treatment of adults with complicated urinary tract infections (cUTI ) and complicated intra-abdominal bacterial infections (cIAI) caused by certain susceptible gram-negative bacteria.

Limited clinical safety and efficacy data led to the approval of the drug for the above-mentioned indications. Recarbrio offers an additional treatment option for patients with cIAI and cUTI, who have limited and in some cases, no alternative therapeutic options.

Recarbrio received the FDA’s Qualified Infectious Disease Product (QIDP) designation for the treatment of cUTI and cIAI. QIDP is a designation granted to antibacterial or antifungal drugs for human use, intended to treat serious or life-threatening infections.

This designation can boost the sales uptake of the drug. The stock has a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Johnson & Johnson’s JNJ second-quarter 2019 earnings came in at $2.58 per share, which beat the Zacks Consensus Estimate of $2.42 and increased 22.9% from the year-ago period. Johnson & Johnson has a Zacks Rank #3.

Adjusted earnings exclude gains from the divesture of Advanced Sterilization Products business in April, after-tax intangible amortization expense and some special items. Including these items, J&J reported second-quarter earnings of $2.08 per share, up 43.4% from the year-ago quarter.

Sales of the drug and consumer products giant came in at $20.56 billion, which beat the Zacks Consensus Estimate of $20.32 billion. Sales declined 1.3% from the year-ago quarter, reflecting an operational increase of 1.6%, which was offset by an unfavorable currency impact of 2.9%. (Read: J&J Beats on Q2 Earnings, Ups 2019 Sales Growth View)

International Business Machines Corporation IBM delivered second-quarter 2019 non-GAAP earnings of $3.17 per share, which surpassed the Zacks Consensus Estimate of $3.06. Further, earnings per share increased 9 cents from the year-ago quarter.

Revenues of $19.16 billion outpaced the Zacks Consensus Estimate of $19.11 billion but declined 4.2% on a year-over-year basis. At constant currency, the metric dipped 1.6%. The year-over-year revenue decline can primarily be attributed to currency fluctuation and headwinds from the IBM Z product cycle.

Notably, Zacks Rank #3 IBM stated that signings declined 14% on cc basis in the second quarter to $9.7 billion. Services backlog fell 4% year over year and totaled $111.2 billion. IBM has completed the acquisition of Red Hat for $34 billion in cash. The deal is part of the company’s efforts to bolster Open Hybrid Architecture Initiative. (Read: IBM Tops Q2 Earnings & Revenue Estimates, Acquires Red Hat)

The Goldman Sachs Group, Inc.’s GS second-quarter 2019 results recorded a positive earnings surprise of 22.8%. The company reported earnings per share of $5.81, comfortably beating the Zacks Consensus Estimate of $4.73. However, the bottom line compares unfavorably with earnings of $5.98 per share recorded in the year-earlier quarter.

Goldman’s net revenues were down 2% year over year to $9.5 billion in the reported quarter. The revenue figure, however, surpassed the Zacks Consensus Estimate of $8.7 billion. As of Jun 30, 2019, the company’s Common Equity Tier 1 ratio was 13.8% under the Basel III Advanced Approach, highlighting valid transitional provisions. The figure was up from the prior quarter’s 13.7%. (Read: Goldman Q2 Earnings Beat, FICC Revenues Disappoint)

Performance of the Top 10 Dow Companies

The table given below shows the price movement of the 10 largest components of the Dow, which is a price-weighted index, over the past five days and during the last six months. Over the past five trading days, the Dow has lost 0.4%.

Next Week’s Outlook

The U.S.-China trade war continues to make the investment climate difficult all over the world. If anything, this week has proved once again that trade tensions are unlikely to abate in the near term, with both sides adopting inflexible positons. In such a situation investors will look toward to the Fed for relief, especially next week, when a rate hike is expected to take place after the central bank’s two-day meeting.

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International Business Machines Corporation (IBM) : Free Stock Analysis Report
 
JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
Merck & Co., Inc. (MRK) : Free Stock Analysis Report
 
Johnson & Johnson (JNJ) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
 
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