U.S. stocks rallied, heading toward their first gain in three days after a batch
ID: 2777547 • Letter: U
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U.S. stocks rallied, heading toward their first gain in three days after a batch of better-than-estimated earnings from companies including McDonald’s Corp. and EBay Inc. boosted optimism on the health of corporate America.
Equities got a further lift from prospects Europe will move to bolster its economy. European Central Bank President Mario Draghi said today policy makers willinvestigate fresh stimulus measures to thwart downside risks to the growth and inflation outlooks.
McDonald’s jumped the most in seven years and EBay headed for its biggest gain since 2012. Dow Chemical Co. advanced 5 percent after its earnings topped forecasts, and Texas Instruments added 10 percent after better-than-estimated results. American Express Co. lost 5.5 percent after results missed analysts’ forecasts. Valeant Pharmaceuticals International Inc. fell another 14 percent after tumbling 19 percent yesterday.
The Standard & Poor’s 500 Index rose 1.7 percent to 2,052.22 at 12:35 p.m. in New York, rallying above its average price during the past 100 days. The Dow Jones Industrial Average gained 300.34 points, or 1.8 percent, to 17,468.95, while the Nasdaq Composite Index climbed 1.7 percent.
“Today’s rally is definitely being driven by what the ECB did,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC, which manages about $1 trillion in assets. “That’s what’s really driving this rally and today’s risk-on environment. Earnings expectations were very, very low and it’s been easy to beat those expectations and that’s also been contributing to this rally.”
Microsoft Corp. and Amazon.com Inc. release results after markets close, among 46 companies in the S&P 500 posting earnings today. Of those that have reported so far, 44 percent have topped sales estimates and 74 percent have beaten profit projections. Third-quarter earnings are projected to fall 6.7 percent, data compiled by Bloomberg show.
Meanwhile, volatility across global markets is dissipating after whipsawing stocks, bonds and commodities for two months. The Bank of America Merrill Lynch Market Risk Index is at its lowest level since August, while the Chicago Board Options Exchange Volatility Index of U.S. equity turbulence recently posted the longest streak of daily declines since 2009. The gauge known as the VIX fell 13 percent Thursday to 14.47, its lowest since Aug. 18 and is on track for its biggest monthly drop ever.
(Market cap in millions of dollars)
With the earnings season gathering pace, investors are looking to corporate America for clues on the strength of the economy as the Federal Reserve considers raising interest rates for the first time since 2006. Mixed data in the U.S. and volatile financial markets kept the central bank from tightening last month and reduced expectations for an increase this year.
March is the first month for which traders are pricing in at least even odds of a liftoff, according to data compiled by Bloomberg. The probability of a boost this month is now only 6 percent, and about 32 percent for December.
A report today showed sales of previously owned homes rose in September to the second-highest level since February 2007, the latest sign that the recovery in residential real estate will support growth in the world’s largest economy. Separate data showed fewer Americans than forecast filed applications for unemployment benefits last week, while the four-week average was the lowest in four decades.
Valeant Pharmaceuticals, a lightening rod during Wednesday’s session was on track for a two-year low as it lost 14 percent. Citron Research, a stock commentary site published by short seller Andrew Left, claimed in a report yesterday that Valeant had recorded fake sales to phony customers, using closely associated specialty pharmacies to help drive the business. Valeant called Citron’s accusations “erroneous” and denied the report.
A BMO Capital Markets analyst who has advised buying the stock for more than two years downgraded the shares today, citing questions about Valeant’s close ties to pharmacies that distribute its drugs.
Nine of the S&P 500’s 10 major groups rallied Thursday, with eight posting gains in excess of 1.4 percent. Industrial and raw-material companies led, with each rising more than 2.7 percent.
United Rentals Inc. surged 11 percent, the most in two years after its results beat expectations and it reaffirmed its revenue forecast. Southwest Airlines Co. and Stanley Black & Decker Inc. rose more than 6.2 percent, joining in to lead gains among industrials after their earnings also exceeded analysts’ estimates. Southwest helped buoy a 3.4 percent gain for an index of airline companies, which rose to the highest level since May. Delta Airlines Inc. rose 2.9 percent, on track for an all-time high.
Health-care stocks were the benchmark gauge’s only laggard, falling 1 percent. Seven members of an S&P index of these companies fell more than 5 percent. Tenet Healthcare Corp. sank 18 percent, the most since 2008 after another hospital operator, Community Health Systems Inc. reported preliminary earnings that disappointed. Universal Health Services Inc. slumped 11 percent, the most since 2011.
1.Why did the market change with earnings?
2.What is the impact of VIX in the stock market
3.Could you explain the difference between expected earnings and earnings?
4.Companies with earning better than expected are a good buy or sell?
Explanation / Answer
1) The markets changed with the earnings because the earnings beat the analyst forecasts ,the weak earnings expectations were easily beaten by the earnings and also because of the positive words from the ECB that there would be policies to give stimulus to growth and inflation control.
2)VIX is the volatility index, it measures the volatility of stocks, a lower value of VIX index suggests lower volatility. A lower volatility implies lower risk for stocks,Bonds and commodities investing this has helped boost the value of stocks,Bonds and commodities.
3) Expected earnings are the earnings as expected by the analysts and investors in the future of the firm, the analysts forecasts constitute the expected earnings as to what would be the earnings of the stock in the future for some period of time say quarterly or annually. The earnings are the real earnings actually earned by the firm for a given period of time,what is the actual earnings that firm earned during the period.The earnings are given in Annual report as published by the firm.
4) Companies with earning better than expected are a good buy. If earnings beat forecasts that means the expected projected cash flows in the future of the firm were lower than they actually are,as stock value is the present value of these cash flows this resulted in a lower stock value due to lower expected cash flows but after taking into account better earnings which shall result in higher cash flows than expected would result in higher price of the stock and a better buy. Analyst adjust the expected growth rate to higher side when earnings beat the estimates and since stock value is dependent directly on growth rate the higher growth rate drives the stock to the higher side. The high adjusted growth rate coupled with higher anticipated cash flows results in a higher value of stock.
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