Earnings and Tax Reform Drive Records. Here's How Markets Ended the Week.
The Dow Jones Industrial Average and S&P 500 scored a perfect week of records as progress on tax reform and a string of positive earnings reports kept investors in a buying mood.
The Nasdaq wasn't quite as lucky, victim to tech losses mid-week, but did close at records for three of the past five sessions.
Over the past five days, the Dow has risen 2%, the S&P 500 has climbed 0.86%, and the Nasdaq has increased 0.35%.
This week also marked the first time the Dow has risen to and exceeded its 23,000 milestone. The blue-chip index reached that level on Tuesday, Oct. 17, and closed above it on Wednesday, Oct. 18. The Dow first topped the 22,000 mark on Aug. 2.
Healthcare and Taxes on Capitol Hill
Congressional Republicans and the Trump White House made progress on their healthcare and tax agendas in the past week.
Late Thursday evening, Senate lawmakers voted largely along party lines to pass a fiscal 2018 budget resolution that will likely be supported by Congress and could pave the way for tax cut legislation in the coming months. The agreement also includes a mechanism which will enable the tax code to be re-written on the basis of a simple majority vote in the chamber, as opposed to the 60 votes needed at present. Republicans hold 51 of the 100 seats in the Senate, against 49 held by Democrats.
"This resolution creates a pathway to unleash the potential of the American economy through tax reform and tax cuts, simplifying the overcomplicated tax code, providing financial relief for families across the country, and making American businesses globally competitive," the White House said in a statement.
In a tweet Friday, President Donald Trump added, "This now allows for the passage of large scale Tax Cuts (and Reform), which will be the biggest in the history of our country!"
Analysts at Goldman Sachs wrote late last month that the Senate proposals could translate to around $1.5 trillion in tax cuts that are spread over the next 10 years, and are equivalent to around 0.6% of current GDP.
Stock market gains in recent months have largely been supported by the promise of tax reform from the Trump administration and congressional Republicans. However, the reforms proposed have been criticized as largely benefiting the already-rich and 1%.
Meanwhile, drug stocks were under pressure on Monday after Trump went after the industry. In comments at the White House, Trump said health care companies were "getting away with murder" and that drug prices were "out of control."
Insurance stocks such as UnitedHealth Group Inc. (UNH - Get Report) and Aetna Inc. (AET) slumped a week earlier after Trump made his biggest move yet to dismantle the Affordable Care Act -- the Department of Health and Human Services announced that it would cut off subsidies to health insurers under the Obama-era Affordable Care Act.
Third-Quarter Earnings Season Wave
Investors had more than enough earnings reports to sift through in the past week, some of which beat estimates and others not so much.
In healthcare, UnitedHealth Group beat on its bottom line but missed on the top. Overall revenue increased nearly 9%, driven by an 8.4% gain in its pharmacy benefit management unit. Procter & Gamble (PG - Get Report) reported a mixed quarter. By segment, revenue in its baby, feminine and family lines fell short of estimates, while beauty and fabric and home care exceeded expectations.
Johnson & Johnson (JNJ - Get Report) beat earnings estimates and upped its full-year profit guidance. Pharmaceuticals revenue increased 15% over its recent quarter, while medical device sales in the U.S. rose 7%.
Banking earnings highlighted the same issues that plagued Citigroup Inc. C and JPMorgan Chase & Co. JPM when they reported a week earlier, namely a drop in trading revenue. Morgan Stanley (MS - Get Report) posted higher earnings than analysts projected as growth in wealth management made up for the tumbling bond-trading revenue that plagued firms across Wall Street. Fixed-income trading revenue slumped 20%.
Dow component Goldman Sachs Group Inc. (GS - Get Report) trading revenue took a hit, falling 17% and coming in the worst among its peers. That compares with trading declines of 16% at JPMorgan Chase & Co. (JPM - Get Report) , 13% at Bank of America Corp. (BAC - Get Report) and 8% at Morgan Stanley.
International Business Machines Corp. IBM was a top performer in the tech space. The company posted adjusted earnings of $3.30 a share on revenue of $19.2 billion. Analysts polled by FactSet were projecting adjusted earnings of $3.28 on revenue of $18.6 billion.
Contributing heavily to the third-quarter revenue beat, which was the largest in five years, was IBM's Cognitive Solutions segment, which contains a big portion of its software operations. Revenue in the segment rose 3.9% to $4.4 billion, topping estimates and representing a turnaround from a decline of 2.5% in the second quarter.
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Netflix Inc. (NFLX - Get Report) reported third-quarter earnings and sales that topped Wall Street forecasts, added 5.3 million new subscribers worldwide, and said it plans to spend between $7 billion and $8 billion on content in 2018, up from the $6 billion it will spend this year. Netflix said it already has committed to spend $17 billion over the next several years on content, and noted that its original content budget continues to swell each year.
"Our future largely lies in exclusive original content that drives both excitement around Netflix and enormous viewing satisfaction for our global membership and its wide variety of tastes," the company wrote in its third-quarter letter to shareholders released on Monday. "Our investment in Netflix originals is over a quarter of our total P&L content budget in 2017 and will continue to grow."
General Electric Co. (GE - Get Report) missed quarterly profit estimates for the first in more than two years. The industrial conglomerate reported net income of 21 cents a share, a penny less than a year earlier. Adjusted profit of 29 cents a share fell far below estimates of 49 cents. Revenue rose 14% to $33.47 billion, coming in roughly $1 billion above consensus. CEO John Flannery, in his first quarter since assuming the position, said that this was a "challenging quarter," largely tied to a decline in its power unit.
Just under one-fifth of S&P 500 companies have reported earnings so far, the majority of which have bested profit and sales estimates. Analysts anticipate blended earnings growth of 4.2% in the third quarter, or 2.1% excluding energy, according to Thomson Reuters estimates. Revenue is expected to rise by 4.4%.