US Stocks Rally Ahead of FOMC

US stocks rose on Tuesday, July 25, as earnings reports beat estimates ahead of the widely expected FOMC interest rate meeting conclusion today, Wednesday, July 26. The Dow Jones Industrial Average DJIA (USA 30) index rose 0.08% to close at 35,438, the 12th positive session in a row and the longest rally since 2017. The S&P 500 (USA 500) advanced 0.28% to 4,567, while the Nasdaq (US TECH 100) rose 0.61% to 14,145. The moves came as investors considered the busiest stretch of earnings season so far.

Microsoft (MSFT) reported strong earnings, but its stock declined, while Alphabet (GOOG) announced a new role for its CFO,  overseeing Google’s investments in artificial intelligence (AI) and the company’s expansion to India. General Electric (GE) also reported strong Q2 earnings. On the other hand, Raytheon (RTX) declined significantly after announcing issues with its Airbus (AIR.DE) A320neo jet engines. Looking ahead, Amazon is expected to report earnings after the close on Thursday, with McDonald's forecast to report earnings ahead of the open on Thursday.

Which Stocks Moved The Markets?

The Q4 earnings report from Microsoft revealed a decline in the growth of Azure cloud revenue, which overshadowed the company's exceptional profits and revenues. The stock price of MSFT declined 4% after-hours despite Q4 revenue increasing by 8% as investors anticipated better numbers in Azure growth. However, the stock still trades around 43% higher year-to-date in 2023. (Source:YahooFinance)

Alphabet's Q2 profit exceeded Wall Street expectations, led by robust demand for cloud services and recoil in advertising, leading to an 8% increase in Alphabet's shares during after-hours trading. Starting September 1, Ruth Porat, the company's current CFO, will become the chief investment officer (CIO)  and president, taking charge of Other Bets and global investments. Advertisers, a key revenue source for Alphabet, have reduced spending on untested platforms, benefiting both Alphabet and Meta Platforms. With already 80% of advertisers using AI-driven search products, Alphabet is testing ads in its AI-powered search.

In the most recent string of labour deals, UPS (UPS) and the Teamsters reached an agreement that avoided a potential strike at the package delivery company. UPS was not due to report, but the Teamsters represent approximately 340K workers at UPS, with the deal valued at around $30B, a significant win. Under the five-year contract terms, part-time workers will receive a minimum wages of $21/hr, and full-time workers will receive $49/hr. The deal is still pending ratification by the workers. UPS shares climbed 1% following the upbeat announcement.

General Electric shares surged more than 5% to reach a 1-year high after reporting stronger-than-expected earnings on Tuesday, July 25. Although adjusted EPS declined nearly 13% compared to the prior year, at $0.68/shr, it beat the consensus expectation of $0.46 by a significant margin. Moreover, sales grew 14.9% compared to the prior year. In a cheerful move, the company also raised its guidance for earnings this year to well above consensus, expecting free cash flow to range from $4.1 to $4.6B compared to $3.6-4.2B last year.

RTX emerged as the worst-performing stock on the benchmark S&P 500 on Tuesday. Its share price plummeted to a nine-month low following the disclosure of a defect in its Pratt & Whitney jet engine division, requiring fleet inspection and the removal of around 200 engines over the next two months. The affected engine model is used on the Airbus A320neo. As a result of the problem, the company had to reduce its free cash flow guidance this year by around $500M. Besides the setbacks, the company delivered relatively good earnings, with EPS beating forecasts and sales rising 12% compared to the prior year. The company even upped the lower end of its EPS guidance range by five cents.

Who's Next On The Docket?

Amazon will report its Q2 earnings after the close on Thursday, July 27. The consensus of expectations is that it will report earnings of $0.35/sh on the bottom line, with revenue reaching $131.5B on the top line. This reflects a significant improvement compared to last year's EPS of -$0.20/sh and sales of $121.2 billion. The expected profit increase can be attributed to the company's efforts to cut costs over the past year, including headcount reductions. Amazon Web Services (AWS) has been the company's profitability. As a result, investors will be eager to see strong profit guidance that supports long-term returns.

McDonald's will also report its earnings for Q2 on Thursday but before the open. EPS is expected to show a notable increase of 8.7% over the last year to $2.77/shr. Additionally, sales are expected to have increased by 8.6% to $6.22B. The improvement can be attributed to the rising prices on its menu offerings and efforts to expand its footprint in the market. However, elevated costs for raw materials and wages might have pressured the margins.

Conclusion

US stocks closed higher on Tuesday, July 25, with the DJIA clocking its 12th consecutive session in the green. The S&P 500 and Nasdaq also rose as the markets digest the busiest portion of earnings so far. About 79% of companies reporting so far have exceeded expectations.

Investors are now waiting for the Federal Reserve's monetary policy decision later on today, Wednesday, with a focus on Fed Chair Jerome Powell's comments following the meeting. Markets expect the Fed to hike by a quarter percentage point. Are they in for a disappointment?