Caterpillar beat lifts U.S. stock sentiment

Shares of Caterpillar hitting a five-year high and McDonald’s a record peak on Tuesday.

Shares of Caterpillar hitting a five-year high and McDonald’s a record peak on Tuesday have underpinned U.S. stock sentiment and apparently rekindled investor appetite for solid earnings.

Heavy lifting

The world’s biggest construction kit maker and largest restaurant chain helped lift major indices out of a wavering phase that followed a smattering of high-profile earnings ‘misses’ last week and reports from big banks earlier this month that were largely deemed unsatisfactory. Tuesday’s top-tier ‘beats’ provided the right news at the right time for the S&P 500. It had drifted about half a per cent lower up to Monday’s close since last Thursday.

Caterpillar’ total Q2 sales easily lifted above Wall St’s expectation of $10.93bn with a 9.6% rise to $11.33bn. And it dug deeper than consensus for EPS at $1.26 with a towering 46% build in net income to $802m, or $1.49. The industrial group has often been seen as a quintessential ‘Trump-trade’ stock, but as recently as Q4 noted difficulty bridging the gap to a steepening price/earnings gradient with sufficient earnings growth.

On Tuesday though it said sales in its biggest market, North America, were up 7%, aided by revived demand in mining and energy. Its third-biggest market, Asia-Pacific, grew 23%, driven by an infrastructure push, house building boom and ‘Silk Road’ investments in China. On Tuesday though it said sales in its biggest market, North America, were up 7%, aided by revived demand in mining and energy. Its third-biggest market, Asia-Pacific, grew 23%, driven by an infrastructure push, house building boom and ‘Silk Road’ investments in China. 

Caterpillar has thereby transformed from a company saying in January that 2017 profits would be sharply below expectations, into one that on Tuesday raised its full-year forecast for the second time.

New eats beat

At McDonald’s, the group’s efforts over the last two years under turnaround CEO Steve Easterbrook to reorient itself to changing U.S. eating habits and tastes by introducing healthier options and flatter prices, bore fruit with MCD’s best sales growth in five years. New drink specials helped increase traffic and spending, and a new sandwich launch brought in both previous MCD diners and new ones.

China featured strongly in McDonald’s earnings too. Comparable sales gains there of 7% were almost double the rise investors widely expected. This helped McDonald’s beat the Street with earnings of $1.73 per share, against an average forecast of around $1.62. Revenues were down 3.4% to $6.05bn but still above investors’ average estimate of $5.96bn.

The thin end of the wedge

As the muscular showings by MCD and CAT go some way to rebooting investors’ willingness to react in kind to successful quarters, running forecasts compiled by providers like FactSet, Bloomberg and Reuters also help brighten sentiment.

Blended estimates and actuals projected Q2 S&P 500 earnings growth of 9.1% on Tuesday compared to around 8% early this month, optimism that lifted the S&P 500 to its latest record. With the slate for the remainder of the week replete with other influential names—AT&T and Texas Instruments on Tuesday night, Ford, Coca Cola, Boeing, Facebook and others later—even slightly topped expectations could trigger further all-time highs by Friday.

Particular attention may now fall on the huge exporters that are also Dow Industrials after DJIA rose just shy of its own recent record peak on Tuesday. Whilst few large U.S. companies have so far commented on the dollar’s 6% trade-weighted decline since January, the softer greenback is likely to have been a tailwind.

One of the DJIA’s most in-focus technical patterns right now, a rising wedge, does offer a caution for the market’s very near-term trajectory. Price is converging to the narrow end of the wedge at the 14th July (21681.53) peak. Such a pattern would normally be a bearish signature, particularly in a downtrend. U.S. markets have seen no such run, so another failure to surpass 21681.53 is unlikely to trigger a severe correction—particularly as momentum studies (like RSI) are now far away from overstretched. That said bulls should still prepare for a deeper setback if DJIA breaks recent support close to 21470.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.