You know it has been a busy week when a jobs report is not the headliner of market news. Between the House GOP's tax plan, earnings from some of Wall Street's biggest players, and a new nominee to head the Federal Reserve, investors were flooded with other move-triggering news this week.
Wall Street did manage to end the week at new records. For the week, the Dow was up 0.45%, the S&P 500 0.26%, and the Nasdaq 0.94%.This week's gains mark the Dow and S&P 500's eighth increase in a row, and the Nasdaq its sixth.
Tech Earnings Power On
Apple Inc. (AAPL - Get Report) was the largest company to report earnings in the past week. The iPhone maker posted better-than-expected fiscal fourth-quarter earnings and upbeat guidance for the coming quarter. A solid forecast tamed any fears that the company might see underwhelming iPhone sales.
On the company's conference call following the release of the results on Thursday, CEO Tim Cook said Apple was "bullish' on the holiday season. "This is going to be the best holiday season yet," Cook said.
Apple forecast sales of between $84 billion and $87 billion for the three months ending in December, the first quarter of its 2018 fiscal year, a figure that came in at the high end of analysts' forecasts and put to rest speculation of production bottleneck and technical snags related to the much-anticipated launch of its iPhone X.
Apple also shifted 46.7 million iPhones over the quarter that ended in September, the company said, topping Wall Street forecasts of 46.4 million, although average selling prices slipped to $618, continuing a declining trend. Still, net income rose 18.8% to $10.71 billion and Apple said it expects gross margins for the first quarter to improve by 5 basis points to 38.5%.
Facebook Inc. (FB - Get Report) warned that its profitability would be affected by ongoing investments in security. Facebook and other tech giants have testified before Congress this week about the role their platforms and services played in Russian interference in the U.S. presidential election.
"Our community continues to grow and our business is doing well," wrote CEO Mark Zuckerberg. "But none of that matters if our services are used in ways that don't bring people closer together. We're serious about preventing abuse on our platforms. We're investing so much in security that it will impact our profitability. Protecting our community is more important than maximizing our profits."
Facebook reported third-quarter earnings of $1.59 a share, well ahead of estimates of $1.28, while revenue in the quarter jumped 47% from a year earlier to $10.3 billion.
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Tesla Inc. (TSLA - Get Report) missed earnings estimates and pushed out some of CEO Elon Musk's ambitious production targets. For the quarter, Tesla posted an adjusted loss of $2.92 a share, substantially wider than the shortfall of $2.31 that analysts had expected. Revenue of $2.98 billion exceeded the consensus call of $2.95 billion.
Tesla said it expects production of the up-market Model S and Model X SUV to drop 10% from the third quarter to the fourth quarter, as it shifts workers to Model 3 production. Musk already had warned investors in early October that Model 3 production would come in well below expectations. The company churned out just 222 Model 3s in the third quarter, in line with Tesla's October guidance but well below the 1,500 the company had previously expected.
Around four-fifths of S&P 500 companies have reported earnings so far this reporting season. Of those, 72% have topped earnings estimates, while 67% have exceeded revenue consensus. Economists anticipate blended earnings growth of 8%, or 5.6% excluding energy, according to Thomson Reuters.
"The first half of the season has been good relative to expectations," LPL Financial's John Lynch and Ryan Detrick wrote in a note. "Strong upside and big increases in technology and energy earnings have offset financials weakness and driven the upside relative to expectations... We expect solid results may continue in November based on the strong macroeconomic backdrop, resilient estimates, and a weaker U.S. dollar."
Fed Moves and a New Pick for Chair
President Donald Trump made no waves on Thursday with his pick for Federal Reserve chair. Trump named Jerome Powell as his nominee, a widely expected decision.
If confirmed by the Senate, Powell will take over from current Chair Janet Yellen, who has held the seat since 2014, when her four-year term expires in February 2018. Yellen oversaw the Fed's slow-and-steady move away from near-zero rates and toward normal monetary policy.
Powell has been a member of the Fed's board of governors since 2012 and was widely expected to be named as Trump's pick. In his five years on the board, Powell has largely supported Yellen's moves, which has led markets to believe he will continue to normalize monetary policy at the same pace as his predecessor.
"In terms of whether or not he's a hawk or a dove, the same could be asked of Chair Yellen, who was believed to never want a rate hike on her watch, but when conditions warranted it she emerged more hawkish than thought possible," said Quincy Crosby, chief market strategist at Prudential Financial. "Under Powell expect a pragmatic path on monetary policy, along with an equally pragmatic path on industry regulation. In other words, continuity with a Republican tilt."
Trump's pick is nontraditional in that new presidents have largely reappointed sitting Fed chairs for a second term. Most recently, former president Barack Obama reappointed George W. Bush pick, Ben Bernanke, before nominating Yellen in late 2013.
On Wednesday, Nov. 1, the central bank decided to leave the federal funds rate unchanged at 1% to 1.25%, a widely expected decision following a two-day meeting. The chances of a hike at the December meeting increased to 96%.
Members of the Federal Open Market Committee said that the U.S. economy warrants gradual increases and anticipates rates to continue to rise at future meetings. The central bank also called the U.S. economy "solid" despite hurricane disruptions -- the decision-making arm does not expect the impact of hurricanes to change the course of growth. The Fed also said the labor market continues to strengthen, but did note that inflation remains "soft" and below its 2% target.
GOP Tax Plans Unveiled
House Republicans proposed major tax-reform changes, designed to permanently cut the corporate tax rate and, they say, lift some of the tax burden off of the middle class.
Among the changes in "The Tax Cuts and Jobs Act" bill released by the House Ways and Means Committee on Thursday is lowering the rate for "pass-through" businesses to 25% and reducing the corporate tax rate to 20% from 35% on a permanent basis, refuting earlier reports that the cuts would be a temporary one. The bill also allows write-offs for equipment investments and gives tax credits for research and development.
The $1.51 trillion tax plan cuts the number of personal tax brackets to three -- 12%, 25%, and 35% -- from seven, though it keeps a top rate of 39.6% for high earners. A single with income of $24,000 or less will pay no income tax, the 12% bracket will apply to income up to $90,000, the 25% bracket to income up to $260,000, and the 35% levy to income up to $1 million. The plan also proposes increasing a child tax credit by $600 to $1,600, and leaving 401(k) contribution amounts unchanged.
Changes to how much Americans can deduct on their mortgages came as one of the largest shocks, sending homebuilder stocks such as D.R. Horton Inc. (DHI - Get Report) and Toll Brothers Inc. (TOL - Get Report) into a tailspin on Thursday. House Republicans propose that Americans can take the deduction only on mortgages of $500,000 or less, a cut from the current level of up to $1 million, according to The Wall Street Journal.
The House Ways and Means Committee will meet on Monday, Nov. 6, to begin the process of finessing the legislation before bringing it to the House floor for a vote.
A Solid Rebound in Jobs for October
Markets digested a strong rebound in jobs growth on Friday, Nov. 3, but weaker wages. The U.S. economy added 261,000 jobs in October, according to the Labor Department, a sharp rebound from an anemic gain in payrolls in September. The previous month's number was revised to show an 18,000 increase from an initial reading of a decline of 33,000. September's number was tied to the impact from Hurricane Harvey and Irma in late August and early September.
However, October's headline number was weaker than expected. Economists anticipated 308,000 jobs to have been added to the U.S. economy in October, according to FactSet estimates. Bloomberg estimates were slightly higher at 325,000.
Hourly pay rose 2.4% year over year, weaker than an expected increase of 2.7%. Wage growth has remained stubbornly low in recent months, a conundrum that has concerned the Federal Reserve.
The unemployment rate made a surprise decline to 4.1%, its lowest level since December 2000, following a reading of 4.2% in September. Economists predicted the unemployment rate would hold steady.
"Looking a little deeper, there are reasons for concern," said Bradford McMillan, chief investment officer at Commonwealth Financial Network. "Average job growth over the past two months is around 140K, which is substantially lower than the first half of the year, and suggests job creation is slowing. Looking at the unemployment and underemployment rates, this is probably due to a shortage of workers, which suggests the decline will continue."