The Washington gridlock on the debt ceiling issue will remain the major issue for the market today, likely overshadowing the positive second-quarter earnings season.
The markets have thus far shrugged the entire story as nothing more than the usual partisan drama out of Washington DC. The rational conclusion of market participants has been that the nation’s pristine credit profile is way too precious an attribute to be sacrificed for ideological purity.
As a result, solid earnings reports have pushed stocks close to the late-April highs. The greenback has remained fairly stable and the yield on the benchmark 10-year Treasury bond is in the 3% vicinity. This seeming disregard of the debt ceiling debate is the right approach, though it may be getting difficult to do as the August 2 deadline gets closer.
The earnings picture has been very reassuring thus far. With about a third of the reports in, we have a better than 20% year-over-year growth in earnings once we adjust for some of the unusual reports in the banking group. And as expansion in margins is decelerating, top-line gains are driving most of the earnings growth.
Of the earnings reports this morning, we had Baker Hughes (BHI) come ahead of earnings and revenue expectations. Kimberly-Clark (KMB) also topped expectations, but rising input costs prompted management to give a tempered outlook. Lorillard (LO), the maker of Newport cigarettes, modestly came ahead of EPS and expectations. We have Texas Instruments (TXN) and Netflix (NFLX) reporting after the close today.
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