U.S. Stocks Little Changed as Deal Talk Offsets Earnings Worry

  • Microsoft reaches record, Time Warner jumps on M&A speculation
  • Dollar surge spurs worries of forex drag on corporate profits

GE, Honeywell Face Hurdle of Slow Economic Growth

U.S. stocks closed little changed after erasing an early selloff, as deal activity boosted consumer stocks and Microsoft Corp. rallied to a record, offsetting losses spurred by concerns a stronger dollar will damp corporate earnings.

Equities rebounded as Reynolds American Inc. soared the most ever after British American Tobacco Plc offered to pay $47 billion for full control of the cigarette maker. Time Warner Inc. jumped to a 15-month high on speculation it may agree to a takeover by AT&T Inc. That blunted declines spurred by the surging dollar and disappointing outlooks from General Electric Co. and Advanced Micro Devices Inc. AT&T sank 3 percent to a seven-month low.

The S&P 500 Index fell less than a point to 2,141.16 at 4 p.m. in New York, all but wiping out an early 0.5 percent drop. The benchmark capped its first weekly advance in three, increasing 0.4 percent. The Dow Jones Industrial Average lost 16.64 points, or 0.1 percent, to 18,145.71. The Nasdaq Composite Index rose 0.3 percent, buoyed by Microsoft and PayPal Holdings Inc., which jumped 10 percent. About 6 billion shares traded hands on U.S. exchanges, 8 percent below three-month average.

“This is going to be an earnings reporting season that is going to be moving us back toward positive earnings growth,” Bill Northey, chief investment officer at US Bank’s Private Client Reserve in Helena, Montana, said by phone. “But against that backdrop, we’ve seen a pretty strong jump in the dollar. We’ll have to keep an eye on how strong the U.S. dollar becomes and how U.S. equity markets perform.”

After surging as much as 7.2 percent this year through a record in August, the S&P 500 has failed to push higher as investors assess central-bank policy, the strength of corporate America and economic reports. The index hasn’t climbed for three consecutive sessions in a month, vacillating between daily gains and losses while trading at 18 times forecast earnings, the highest since 2009. The CBOE Volatility Index fell for a fourth session, the longest streak in three months.

Earnings remained in focus today, as nine S&P 500 firms reported. More than a fifth of the gauge’s companies have released results so far, and while 81 percent have beaten earnings expectations, analysts still forecast a 0.4 percent contraction in overall third-quarter profits. That compares to a 1.6 percent decline predicted just before the reporting period began two weeks ago.

“Earnings this season have been all over the place, a mixed-to-OK season,” said Otto Waser, chief investment officer of R&A Group Research & Asset Management in Zurich. “People are generally more cautious when rates rise. Underlying earnings growth is close to zero, so why should the market move higher with interest rates going higher?”

Among shares moving on earnings news:

  • GE slipped 0.3 percent, after falling as much as 2.6 percent. The company cut its 2016 forecast for organic sales growth, projecting the figure would be flat to up 2 percent this year, after previously forecasting an increase of as much as 4 percent.

  • Advanced Micro Devices fell 6.3 percent after predicting fourth-quarter revenue that will miss analysts’ estimates, hurt by dwindling orders for game console processors.

  • Microsoft reached a record, rising 4.2 percent as its results were bolstered by growing demand for cloud-based software and services.

  • PayPal climbed to an all-time high after saying it will make more money in coming years than previously expected, easing concern that recent deals with credit card companies would suppress earnings.

  • McDonald’s Corp. marked its strongest gain in a year as quarterly revenue topped estimates, helped by international markets including the U.K. and Canada.

The dollar is also in the spotlight. The greenback gained versus most peers and for a fourth consecutive day against the euro. It is the strongest since March relative to the single currency after European Central Bank President Mario Draghi signaled that quantitative easing won’t come to an “abrupt” end, leaving traders waiting until at least December for news about policy changes. GE said foreign exchange effects will hurt earnings by as much as 6 cents a share this year.

“If you have to translate foreign earnings into stronger currency your earnings expectations are going lower,” said Waser. “This caps earnings upside quite a bit.”

Investors are also parsing economic data and comments by policy makers for hints on the timing of the Federal Reserve’s next interest-rate increase. Reports on manufacturing, consumer confidence, durable goods orders and gross domestic product will be in focus next week.

Traders are pricing in less than one-in-five odds of a hike at the Fed’s next meeting, which takes place days before the presidential election, and a 69 percent chance of action in December. San Francisco Fed President John Williams said in a speech today that slow growth is likely “here to stay,” and he repeated his support for a gradual increase in rates “sooner rather that later.”

In Friday’s trading, seven of the S&P 500’s 11 main industries fell. Phone companies led losses for a second day, their worst back-to-back performance in two months. Energy and health-care companies sank more than 0.6 percent. Time Warner helped drive the consumer-discretionary group higher, while Reynolds American and rival cigarette makers Altria Group Inc. and Philip Morris International Inc. lifted consumer staples.

Scripps Networks Interactive Inc. and Discovery Communications Inc. rallied more than 3.6 percent as cable networks rose on the Time Warner deal speculation. Viacom Inc. and CBS Corp. added at least 2 percent, while Netflix Inc. advanced 3.4 percent to a 10-month high.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE