THE WALL STREET JOURNAL. ***** Tuesday, July 30, 2019 |B11
projected to fall more than
12% from a year earlier, com-
pared with expectations of a
less than 2% pullback earlier
this month, according to
FactSet.
Caterpillar was a major
contributor to that shift af-
ter the maker of bulldozers
and excavators missed ana-
lysts’ earnings estimates be-
cause of slowing machine
sales in Asia and higher
costs from U.S. tariffs on
Chinese imports. Shares of
Caterpillar fell more than 2%
last week.
Meanwhile, technology and
communication companies re-
porting so far have mostlysurprised investors to the up-
side, sending shares of each
sector up at least 4.9% this
month.
Excluding a record-setting
fine,Facebooktopped ana-
lysts’ expectations for earn-
ings and revenue, as did
Google parentAlphabet.
But those latest gains have
pushed stocks toward their
richest valuations of the year,
alarming some investors who
fear the market doesn’t have
much juice left to climb higher
in 2019 after the S&P 500
posted its best first half of a
year since 1997.
As of Friday, the S&P 500
traded at 17 times its earningsover the next 12 months, its
highest level since late Sep-
tember, just before the stock
market’s fourth-quarter selloff.
That is above the 10-year aver-
age of nearly 15 times, accord-
ing to FactSet, but well below
the valuations of the dot-com
era.
Alan Adelman, a senior
fund manager at Frost Invest-
ment Advisors LLC, says cur-
rent valuations include inter-
est rates coming down and
expectations of a trade resolu-
tion between the U.S. and
China. If either of those don’t
pan out, stock prices will need
to be readjusted, he said.
There is also some pricing inof a fourth-quarter bounce-
back in corporate profits, with
earnings projected to climb
4.7% from a year earlier after
declining nearly 2% in the
third quarter, according to
FactSet.
“We’re in the late stages of
an economic expansion.
Things can only go on for so
long,” said Mr. Adelman, who
has been focusing on invest-
ing in high-quality stocks that
have relatively stable earn-
ings and offer hefty dividends
that exceed U.S. Treasury
yields. “We have to be realis-
tic. A lot of the positive news
in the market is already
baked in.”want to engineer a soft landing
and pre-empt the more tangi-
ble signs of slowdown—they
feel they have the wiggle room
to do that because there is no
inflation.”
The S&P 500 fell 4.89points, or 0.2%, to 3020.97, re-
treating from its Friday record
close. The Nasdaq Composite
lost 36.88 points, or 0.4%, to
8293.33. The Dow Jones Indus-
trial Average rose 28.90 points,
or 0.1%, to 27221.35.MARKETS
Investors will get a fresh
look Tuesday at the Fed’s pre-
ferred inflation gauge, the
price index for personal-con-
sumption expenditures, as well
as the Labor Department’s
monthly employment report
Friday.
Declines in technology
shares pulled the Nasdaq lower,
withAdvanced Micro Devices
losing 54 cents, or 1.6%, to
$33.48, andMicron Technol-
ogyfalling 67 cents, or 1.4%, to
$46.82.
The S&P 500 technology
sector has jumped 5.5% in July,
outpacing the broader S&P
500’s 2.7% gain.
“What really worked last
week is where people are tak-
ing some profits today,” said
Art Hogan, chief market strate-
gist at National Holdings.
Between the Fed meeting,
earnings and U.S.-China trade
talks, investors are looking at a
“relatively catalyst-full weekwith all of those having the
ability to disappoint,” Mr. Ho-
gan added.
Meanwhile, deal news and
earnings drove swings among
individual stocks.
Mylanshares jumped $2.32,
or 13%, to $20.78 afterPfizer
agreed to merge its off-patent
drugs business with the ge-
neric drugmaker, creating a
global seller of lower-price
medicines in an increasingly
competitive business. Pfizer
dropped $1.64, or 3.8%, to
$41.45.
Booz Allen Hamiltonshares
rose $2.34, or 3.4%, to $71.54
after the management and con-
sulting firm reported better-
than-expected earnings.
Elsewhere, the Stoxx Europe
600 edged up less than 0.1% to
notch its sixth gain in seven
trading sessions.
Hong Kong’s benchmark
Hang Seng Index ended the day
down 1% as protests in the citygrew increasingly violent, trig-
gering concerns about the im-
pact tensions with Beijing
could have on the economy.
“Many shopping malls and
stores have been closed...due to
the massive protests, while
people are turning more cau-
tious in their spending,” said
Castor Pang, head of research
at Core-Pacific Yamaichi in
Hong Kong. “That is definitely
going to hurt Hong Kong’s
economy.”
Shares of property firms
New World DevelopmentCo.,
Henderson Land Development
Co. andSwire PacificLtd. fell
at least 2% apiece.
Early Tuesday, the Hang
Seng was up 0.6%.
South Korea’s Kospi lost
1.8% Monday, logging its fourth
consecutive session of declines.
Early Tuesday, it was up 0.6%.
The country has felt the brunt
of the trade dispute between
the U.S. and China..The S&P 500 inched lower
as investors looked ahead to a
Federal Reserve meeting that
many anticipate will result in
the first interest-rate cut since
2008.
Stocks have flirted with re-
cords for much of the summer
as investors
have bet on the
Fed lowering
ratesbyas
much as half a percentage
point at the end of its two-day
meeting Tuesday and Wednes-
day.
Bets on a rate cut have
helped buoy stocks, even as
data have shown the domestic
and global economy slowing.
“The Fed is very proactive,”
said Xavier Baraton, global
chief investment officer for
fixed income at HSBC Global
Asset Management. “They
BYAKANEOTANI
ANDAVANTIKACHILKOTI
Stocks Tread Water Before Fed Meeting
MONDAY’S
MARKET
Source: FactSetJulyIndexperformance,monthtodateS&P500S&P500
6% Technologysector024Rising fears about a no-
deal Brexit pushed the Brit-
ish pound further downward
on Monday, reflecting a shift
in tone from the U.K. gov-
ernment under new Prime
Minister Boris Johnson.
The pound fell 1.3%
against the dollar to $1.2217,
its lowest close since March
2017.
Analysts said the pound’s
drop was precipitated in part
by new polls that showed
gains for the Conservative
Party after Mr. Johnson won
the race to lead the party
last week, replacing former
Prime Minister Theresa May.
Some investors and politi-
cal analysts think Mr. John-
son could call an early elec-
tion before the U.K. is
scheduled to withdraw from
the European Union Oct. 31.
Such a move could poten-
tially allow Mr. Johnson to
build a majority in Parlia-
ment that would support his
efforts to leave the EU with
or without an agreement
that would soften the eco-
nomic blow of a departure.
Though Mr. Johnson has
said that he would prefer to
reach a deal with the EU, he
has also described a previ-
ous agreement struck by
Mrs. May as unacceptable
and signaled that the U.K.
must step up preparations
for a hard Brexit.
“Our base case is that
there will be an early elec-
tion,” said Petr Krpata,
strategist at ING. “Under
this situation, sterling will
go below $1.18 against the
dollar.”
The pound’s latest drop
has added to the currency’s
declines since Mrs. May said
she would quit two months
ago, prompting traders to
rethink assumptions about
Brexit scenarios.
Buoyed in part by the dol-
lar’s gains against the
pound, the WSJ Dollar Index,
which measures the U.S. cur-
rency against a basket of 16
others, rose 0.1% to 90.91.
The yield on the bench-
mark 10-year U.S. Treasury
note settled at 2.056%, com-
pared with 2.081% Friday.
Yields fall when bond prices
rise.
BYSAMGOLDFARB
ANDANNAISAAC
Signs of
Hard Line
On Brexit
Hit Pound
Four recent stock swoons
have something in common:
Almost exactly two months af-
ter the declines, stocks plum-
meted again, retesting their
recent lows.
In 2010, 2011 and twice in
2018, the S&P 500 dropped
sharply, recovered, then stum-
bled again around 55 days
later, according to an analysis
by Morgan Stanley Investment
Management.
For instance, the drop in
summer 2011 that coincided
with ratings firm Standard &
Poor’s decision to downgrade
the U.S. credit rating left the
market at its lowest point in
months on Aug. 8.
By early October, that level
was retested, Morgan Stanley
research noted.
This year, a drop in the S&P
500 started at the end of April
and hit bottom—with the in-
dex off roughly 7%—in early
June. Two months from that
trough is early August.
The historical pattern gives
anxious analysts even more
reason to be wary of the S&P
500’s recent climb.
The S&P 500 is up 21% in- The index is trading far
above the levels at which
many predicted it would end - That has many anticipat-
ing a pullback in the coming
months.
BYCORRIEDRIEBUSCHPattern
Suggests
Shares Could
Retest Lows
AUCTION RESULTS
Here are the results of Monday's Treasury auctions.
All bids are awarded at a single price at the market-
clearing yield. Rates are determined by the difference
between that price and the face value.
13-WEEK AND 26-WEEK BILLS
13-Week 26-Week
Applications $108,876,871,100 $109,525,959,000
Accepted bids $36,000,343,600 $36,000,039,000
" noncomp $1,070,586,200 $850,893,100
" foreign noncomp $200,000,000 $200,000,000
Auction price (rate) 99.476750 98.971194
(2.070%) (2.035%)
Coupon equivalent 2.116% 2.090%
Bids at clearing yield accepted 79.65% 22.24%
Cusip number 912796SQ3 912796RY7
Both issues are dated Aug. 1, 2019. The 13-week bills
mature on Oct. 31, 2019; the 26-week bills mature on
Jan. 30, 2020.
Drilling rig owners and oth-
ers who lease equipment to
U.S. energy producers forecast
a slowdown in activity during
the second half of the year as
natural-gas prices plumb lows
and exploration-and-produc-
tion compa-
nies exhaust
their budgets.
The number of rigs drilling
in the U.S. has declined by
about 10% over the past year,
to 946 last week, according to
oil-field-services firmBaker
Hughes, and big drilling con-
tractors are telling investors
to expect more to be idled in
the coming months.
“We had expected drilling
and completion activity to
have reached the bottom by
now, but that doesn’t appear
to be the case,” Mark Siegel,
chairman of rig operatorPat-
terson-UTIEnergy Inc., told
investors Thursday.
The Houston company said
that on average, 158 of its rigs
were operating during the sec-
ond quarter, down from 176
during the year-earlier period.
It said it expects a further 10%
decline this quarter.
Patterson-UTI’s stock has
lost about 40% over the past
year. Rival Helmerich &
PayneInc. last week made
similarly dour forecasts for its
fleet and has been stripping
components from recently de-
commissioned rigs, a sign that
it sees its downsizing as last-
ing. Its shares are down 22%
since this time last year.
Shares ofNabors Indus-triesLtd., another big owner
of rigs, are down 65% from a
year ago. Nabors had 58% of
its available 194 U.S. land rigs
drilling during the first quar-
ter.
The contract drillers’ strug-
gles reflect a broader conun-
drum for the U.S. energy in-
dustry since energy prices
collapsed in late 2014: The rise
in oil prices, up 24% this year
and nearly double what it was
at the depths of the bust,
hasn’t been enough to bring
the sector consistent profit-
ability or interest from inves-
tors.
On Monday, U.S. crude fu-
tures closed up 1.2% to $56.87
a barrel on the New York Mer-
cantile Exchange. Brent crude,the global price gauge, gained
0.4% to $63.71 on London’s In-
tercontinental Exchange.
In early 2016, when U.S.
crude prices dipped below $30
a barrel, oil-field-services pro-
viders predicted that they
would need oil to trade around
$60—not the $100-plus perch
from which it had fallen—to
regain profitability, said Rob-
ert Callaway, managing part-
ner at Range Valuation Ser-
vices LLC, an oilfield-
equipment appraisal firm.
“In the last downturn, $60
was thought to be the light at
the end of the tunnel,” Mr.
Callaway said. “Here we are,
and it’s not working for a sig-
nificant number of oil-field-
services companies.”Rig owners, as well as the
companies that lease their
equipment, have been ham-
pered by depressed natural
gas prices and pressured by
investors to operate with more
austerity.
Natural gas hit a new three-
year low on Tuesday, with fu-
tures for August delivery set-
tled down 1.2% to $2.141 per
million British thermal units.
Analysts with energy fo-
cused investment bankTudor,
Pickering, Holt& Co. said low
prices for the fuel prompted a
40% reduction during the sec-
ond half of last year in the
number of hydraulic fracturing
crews completing wells in Ap-
palachia and the Haynesville
Shale near the Gulf Coast.BYRYANDEZEMBERRig Owners See Further Drilling Decline
The companies are hampered by low natural-gas prices and pressure to operate with more austerity.DANIEL ACKER/BLOOMBERG NEWSing this week.
Still, earnings gains in the
latest quarter have done little
to lift investors’ enthusiasm
about where the stock market
goes from here. And for manu-
facturers likeCaterpillarInc.,
import tariffs and trade ten-
sions continue to weigh on
outlooks. S&P 500 earnings
are expected to rise just 1.7%
over the full year, compared
with the more than 3% ana-
lysts had penciled in last
month.
The muted earnings outlook
for the remainder of the year
has contributed to a rise in
pessimism among investors,
analysts say.
The share of individuals
who say they expect U.S.
stocks to fall or stay flat over
the next six months has risen
above those who are more
bullish on equities, according
to the American Association of
Individual Investors’ latest
survey.
“The ‘Powell put’ is driving
the market higher, but the
problem in the economy isn’t
that rates are too high,” said
Liz Ann Sonders, chief invest-
ment strategist at Charles
Schwab Corp. “What ails us is
a global manufacturing reces-
sion and business confidence
being severely dented by a
trade war.”
Industrial manufacturers
are on pace to notch the sec-
ond-biggest contraction in
quarterly profits after mate-
rials stocks, with earningsContinued from page B1Profits
Ease Fears
On Growth
Consumer
discretionaryHasbroWeyerhaeuserEdisonInternationalMicronTechnologyAlignTechnologyAlphabetCommunication
servicesConsumerstaplesEnergyFinancialsHealthcareIndustrialsInformation
technologyMaterialsRealestateUtilities
–50%MISSED EARNINGS ESTIMATES BEAT EARNINGS ESTIMATES–25 0 25 50 75FacebookCharter
CommunicationsNewmontGoldcorpCompaniesbeatingormissinganalystestimatesforsecond-quarterearnings,bysector
DifferencebetweenactualresultsandestimatesSource: FactSetNote: Chart omits Jefferies Financial Group, which had a positive surprise percentage of 792%, as well as Boeing and Freeport-McMoRan, both of which had negative earnings estimates and negative earnings growth.The U.K. currency
dropped after polls
showed gains for
Boris Johnson.
COMMODITIES