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Stocks Poised for Third Weekly Gain, Flood of Earnings Eyed

U.S. stocks are on track for a third-straight weekly advance, overcoming early losses as the markets digest another heavy dose of earnings reports, while consumer sentiment improved versus last month and U.S.-China trade optimism remains. Stocks are showing some resiliency in the face of Amazon's profit miss and softer-than-expected outlook for the holiday season, with Dow member Intel's results continuing a recent string of upbeat figures from the chip sector. The markets are also shrugging off flared-up U.K. Brexit uncertainty after a recent reprieve earlier this week. Treasury yields are little changed and crude oil prices are down, while gold and the U.S. dollar are higher. Asia finished mostly higher and Europe is mixed as the Brexit uncertainty is being accompanied by a host of divergent data.

At 10:55 a.m. ET, the Dow Jones Industrial Average is up 0.5%, the S&P 500 Index is gaining 0.3%, and the Nasdaq Composite is rising 0.4%. WTI crude oil is decreasing $0.15 to $56.08 per barrel and Brent crude oil is trading $0.35 lower at $61.32 per barrel, and wholesale gasoline is little changed at $1.62 per gallon. The Bloomberg gold spot price is advancing $7.71 at $1,511.71 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—is gaining 0.2% to 97.79. Inc. (AMZN $1,739) reported Q3 earnings-per-share (EPS) of $4.23, below the $4.59 FactSet estimate, as revenues grew 24.0% year-over-year (y/y) to $70.0 billion, north of the Street's projection of $68.8 billion. Operating income from its North American and Amazon Web Services (AWS) segments came in below estimates, while the shortfall in its international segment was much smaller than expected. Revenues out of its North American and international units exceeded forecasts, though its AWS sales came in slightly below projections. The company issued revenue and operating income guidance for Q4—the key holiday shopping season—that missed expectations, noting that it is expecting to invest heavily to ramp up for the holiday season, bolstering its free one-day delivery, growing its cloud business and expanding its warehouse footprint and product selection. Shares are solidly lower but off the worst levels of the day.

Dow member Intel Corporation (INTC $56) posted Q3 EPS of $1.35, or $1.42 ex-items, versus the projected $1.23, with revenues roughly flat y/y at $19.2 billion, north of the forecasted $18.1 billion. The chipmaker said its Q3 performance underscores its progress as its data-centric businesses turned in their best performance ever, making up almost half of its total revenue. INTC issued Q4 guidance that exceeded estimates and raised its full-year outlook. Shares are rallying.

Dow component Verizon Communications Inc. (VZ $61) announced Q3 earnings of $1.25 per share, compared to the forecasted $1.24, as revenues increased 0.9% y/y to $32.9 billion, exceeding the expected $32.8 billion. The company noted higher wireless service revenue, which was partially offset by lower wireless equipment revenue and declines in legacy wireline revenue, predominantly in the business segment. VZ reaffirmed its full-year outlook. Shares are little changed.

Dow member Visa Inc. (V $179) reported fiscal Q4 EPS of $1.34, or $1.47 ex-items, compared to the expected $1.43, with revenues rising 13.0% y/y to $6.1 billion, roughly in line with forecasts. Payments, cross-border and processed transactions volumes all increased y/y. V issued full-year guidance that mostly matched estimates. Shares are higher.

V.F. Corporation (VFC $84) posted fiscal Q2 profits of $1.61 per share, or $1.26 ex-items, versus the forecasted $1.31, as revenues rose 5.0% y/y to $3.4 billion, roughly in line with expectations. The company said its Vans and North Face units drove revenue growth, along with its international and direct-to-consumer platforms. The company reaffirmed its full-year outlook and announced a 12.0% increase of its quarterly dividend to $0.48 per share. Shares are falling.

With earnings season shifting into high-gear this week and results mixed across industries, the Schwab Center for Financial Research offers our latest, Schwab Sector Views: When Yields Talk, Sectors Listen, noting that based on current valuations, which are not far from their 20-year average, and solid fundamentals, we think the Health Care sector could outperform in the coming months. We have a market perform rating on Utilities, Consumer Staples, Financials and Real Estate, based on the highly uncertain environment for the overall market and interest rates, while maintaining our underperform rating for the Communications Services sector.

Consumers feel better in October versus September

The final October University of Michigan Consumer Sentiment Index (chart) was adjusted slightly lower to 95.5, from the preliminary figure of 96.0, where the Bloomberg estimate had expected it to remain. However, the index was above September's 93.2 level and moved further away from the near three-year low posted in August. Both the current conditions and expectations components of the index were revised slightly lower but improved compared to the prior month. The 1-year inflation forecast fell to 2.5% from September's 2.8% rate, and the 5-10 year inflation outlook dipped to 2.3% from 2.4%.

Treasuries are mostly little changed, with the yield on the 2-year note rising 2 basis points to 1.59%, while the yields on the 10-year note and the 30-year bond are flat at 1.77% and 2.26%, respectively. Schwab's Chief Fixed Income Strategist Kathy Jones offers her latest commentary, The Bond Investors' Dilemma, noting that we suggest investors temper expectations about returns in the fixed income markets. She adds that while we still expect most bonds to post positive returns in 2020, it is likely to be driven more by the bonds' coupon payments rather than price gains.

The markets are focusing on the ramped-up earnings season, which is taking some of the focus off the recent progress from the U.S.-China and Brexit fronts, and comes amid the backdrop of a slowing global economy. Schwab's Chief Investment Strategist Liz Ann Sonders offers her latest article, It's Late: So Says the Profits Spread and Leading Indicators, noting that the combination of weak earnings growth, limited macro support for boosting multiples and leading indicators that are decelerating yet again imply the late-cycle view for the economy should remain the consensus. She adds that it doesn't necessarily imply doom for stocks; but we continue to recommend investors keep their equity exposure at a level no higher than their long-term strategic allocation; while using volatility to consider rebalancing more frequently.

Europe mixed on data and latest Brexit developments

European equities are mixed in late-day action, with a host of divergent earnings reports on both sides of the pond being digested, while the latest developments on the Brexit front are being eyed, along with some mixed reads on German confidence. Amazon's disappointing results and guidance for the key holiday season are causing some global concern, but Intel continued the recent trend of upbeat results from the chip sector. Moreover, in Europe, Barclays PLC. (BCS $9) is rising as its Q3 loss is being overshadowed by its relatively favorable trading revenues, while Anheuser-Busch InBev SA/NV (BUD $82) is falling after the brewer missed profit expectations and lowered its outlook. On the Brexit front, after gaining approval in principal of his new deal to break away from the European Union (EU) earlier this week that appeared to ease concerns about the worst case scenario of a no-deal divorce, Prime Minister Boris Johnson's push for a December 12th general election seems to be causing uncertainty to resurface ahead of an October 31st deadline. This comes as EU lawmakers agreed in principal to grant the U.K. an extension but have not decided on the duration of the postponement. German data was mixed, with consumer confidence unexpectedly dipping for November, while the Ifo's business confidence report for this month showed the assessment of the current situation came in below forecasts though the expectations component improved more than expected. The euro is dipping versus the greenback and the British pound is seeing pressure, while bond yields in the region are mostly higher.

With Brexit uncertainty ramping back up and slowing growth causing uncertainty about the ability of central bank stimulus to revive a slowing economy, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his commentary Q&A on Brexit: The Options and Implications for Investors, and delivers his article, Passing the Baton: Signs of Fiscal Stimulus Emerge. Jeff notes that after monetary policymakers took action to lower interest rates and ease financial conditions, they have been asking for fiscal policymakers to enact stimulus though stepped-up government spending and tax cuts. Jeff adds that global central bankers may be starting to get their wish – with a growing list of countries unveiling fiscal stimulus over the past two months, concluding that if this is the start of a broader trend, it may bolster business leaders' global economic growth outlook for 2020.

The U.K. FTSE 100 Index is down 0.3% and Germany's DAX Index is little changed, while France's CAC-40 Index is advancing 0.4%, Spain's IBEX 35 Index and Italy's FTSE MIB Index are ticking 0.1% higher, and Switzerland's Swiss Market Index is rising 0.5%.

Asia mostly higher to close out the week

Stocks in Asia finished mostly higher to end the week, with the markets continuing to hold onto hope of a U.S.-China trade deal as high-level phone discussions are set for today, and yesterday's speech from U.S. Vice President Pence appeared to not derail progress despite some mixed reactions to his comments. The markets continued to digest the flood of mixed global earnings reports, while eyeing the latest Brexit developments and the European Central Bank's unchanged monetary policy decision yesterday. Japan's Nikkei 225 Index rose 0.2%, with the yen choppy, while South Korea's Kospi Index ticked 0.1% higher, amid lingering optimism out of the semiconductor sector following mostly upbeat quarterly results in the region and U.S. recently. China's Shanghai Composite Index moved 0.5% to the upside, though the Hong Kong Hang Seng Index declined 0.5% amid the continued political unrest and following yesterday's larger-than-expected drop in Hong Kong exports. Australia's S&P/ASX 200 Index advanced 0.7% and India's S&P BSE Sensex 30 Index nudged 0.1% higher. With uncertainty regarding the global economy and volatility remaining, Jeffrey Kleintop, discusses in his latest commentary, Are Stocks Priced for Perfection or Recession, how fortunately, stocks are nowhere near that overvalued, based on the price-to-earnings ratio. But, he adds that if we take a more refined look at historical stock market valuations at peaks and lows, we find some cause for concern.

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Important Disclosures

Schwab Center for Financial Research ("SCFR") is a division of Charles Schwab & Co., Inc. The information contained herein is obtained from third-party sources and believed to be reliable, but its accuracy or completeness is not guaranteed. This report is for informational purposes only and is not a solicitation, or a recommendation that any particular investor should purchase or sell any particular security. The investment information mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinions are subject to change without notice in reaction to shifting market conditions.

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