An encouraging start to the second quarter earnings season propelled indices higher on Tuesday. Better-than-expected reports on the home front coupled with positive earnings reports have lifted investor sentiment recently. Benchmarks finished in the green for the fourth consecutive day. Investors overlooked the International Monetary Fund’s discouraging comments on world economic growth. The IMF reduced its global growth estimate for this year yesterday. Nine out of the ten S&P 500 industry groups finished in the green. Shares of the materials and industrial sectors gained the most.
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The Dow Jones Industrial Average (DJI) gained 0.5% to close the day at 15,300.34. The S&P 500 added 0.7% to finish yesterday’s trading session at 1,652.32. The tech-laden Nasdaq Composite Index rose 0.6% to end at 3,504.26. The fear-gauge CBOE Volatility Index (VIX) declined 2.9% to settle at 14.35. Consolidated volumes on the New York Stock Exchange, American Stock Exchange and Nasdaq were roughly 5.8 billion shares, lower than 2013’s average of 6.4 billion shares. Advancing stocks outnumbered the decliners. For the 72% that advanced, only 25% declined.
Following yesterday’s gains, the S&P 500 is marginally shy of its all-time high, achieved on May 21. Investors have become more positive following encouraging reports from the private sector and positive government data on the job markets. A positive start to the earnings season acted as a catalyst as expectations from the second quarter earnings season are low. Going forward, second quarter corporate earnings is expected to decide the trajectory of markets.
Aluminum giant Alcoa Inc (NYSE:AA), reported second quarter results after the close of markets on Monday. The company posted earnings and revenue that surpassed the Street’s estimates. Despite healthy quarterly results, shares declined nearly 0.1% yesterday. The company’s earnings were boosted by robust demand for aluminum from autos and airplanes. Alcoa said global demand for aluminum will increase by 7% in 2013. According to Thomson Reuters data, earnings of the S&P 500 companies are expected to increase by 2.9% in the second quarter from the same period a year ago. This is considerably below the April forecast of 6.1%. Banking giants JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC) are due to report quarterly results on Friday.
Meanwhile, the International Monetary Fund reduced global growth forecast for the fifth consecutive time for the year 2013. The IMF trimmed its global growth forecast for this year to 3.1% from the previous projection of 3.3%. The IMF said: “the possibility of a longer growth slowdown in emerging market economies, especially given risks of lower potential growth, slowing credit, and possibly tighter financial conditions if the anticipated unwinding of monetary policy stimulus in the U.S. leads to sustained capital flow reversals.” In light of rising government spending cuts, IMF reduced its U.S growth estimate for the year 2013 to 1.7%, lower than 2.0% predicted by the U.S. government’s Office of Management and Budget. The fund also said central banks of rich countries should continue with stimulus measures until full economic recovery is attained. IMF further added that a rise in long-term interest rates have hampered the growth of emerging countries.
Rating agency Standard & Poor's decreased Italy's sovereign credit rating to BBB from BBB+. The agency said: “The rating action reflects our view of the effects of further weakening growth on Italy's economic structure and resilience, and its impaired monetary transmission mechanism.”
Shares of material sector gained the most after Alcoa reported better-than-expected quarterly results. The Materials Select Sector SPDR (XLB) gained 1.6%. Stocks such as Air Products & Chemicals, Inc. (NYSE:APD), Monsanto Company (NYSE:MON), Praxair, Inc. (NYSE:PX), and Airgas, Inc. (NYSE:ARG) added 3.9%, 2.2%, 1.6% and 1.3%, respectively.