Bloomberg News

U.S. Stocks Fall on Retail Earnings as Small-Caps Retreat

May 20, 2014

U.S. Stocks Fall on Retail Earnings as Small-Cap Shares Retreat

A Home Depot Inc. store in Peoria, Illinois, on May 19, 2014. Photographer: Daniel Acker/Bloomberg

U.S. stocks fell, halting a two-day gain, as retailers from Staples Inc. to Urban Outfitters Inc. posted worse-than-estimated results and smaller companies slid.

Staples tumbled 13 percent after forecasting second-quarter profit that was less than analysts estimated. Urban Outfitters sank 8.8 percent as earnings missed forecasts. Caterpillar Inc. led industrial shares lower after reporting a steepening decline in retail machine sales.

The Standard & Poor’s 500 Index (SPX) slipped 0.7 percent to 1,872.83 at 4 p.m. in New York. The Dow Jones Industrial Average fell 137.55 points, or 0.8 percent, to 16,374.31. The Russell 2000 Index of small-cap stocks slid 1.5 percent. About 5.7 billion shares changed hands on U.S. exchanges, 13 percent below the three-month average.

“What we’re seeing is a re-assessment of the growth prospects of earnings,” Brad McMillan, the chief investment officer for Commonwealth Financial Network, said by phone. His firm oversees $83 billion. “It’s not a question of ‘are we going to grow?’ Because we are. It’s ‘are we going to grow as fast as we thought we would?’”

Investors are favoring fixed income over equities as concern over valuations roiled stocks from small-cap companies to Internet shares. Exchange-traded funds that buy American bonds attracted $138.8 million yesterday while $2 billion was taken out of equity ETFs, data compiled by Bloomberg show. That reversed year-to-date equity ETF flows and drove withdrawals for the quarter to $711 million. Should the trend continue through June, that would be the first quarterly deficit since the three months ended March 2010, the data show.

Small Caps

The S&P 500 climbed 0.4 percent yesterday in one of the slowest trading days of the year as Internet and smaller companies extended a rebound from last week’s losses. The benchmark index closed at an all-time high of 1,897.45 on May 13 before a selloff in small-cap stocks spread to the broader market.

The Russell 2000 Index fell 3.3 percent over three days last week before rebounding 0.6 percent on May 16 and a further 1 percent yesterday. The gauge is 9.2 percent below its record set in March.

“Between now and June, waning earnings data and no significant U.S. economic data suggest equities have no appreciable catalyst for why they should march significantly higher,” Mark Luschini, chief investment strategist at Philadelphia-based Janney Montgomery Scott LLC, which oversees $65 billion in assets, said in a phone interview. “We’re going to be in this trading range for several months.”

Earnings Season

Salesforce.com Inc. and Intuit Inc. are among S&P 500 companies reporting results today. About 75 percent of those that have posted results this season have beaten analysts’ estimates for profit, while 53 percent have exceeded sales projections, data compiled by Bloomberg show.

Federal Reserve Chair Janet Yellen said last week the U.S. economy has further to go to achieve full health and predicted small businesses will play a vital role in the recovery.

The Fed will release minutes from its latest meeting tomorrow. Policy makers said last month the economy is showing signs of picking up and the job market is improving. The central bank pared its monthly asset buying and said further reductions in “measured steps” are likely.

Fed Bank of New York President William Dudley said the pace of eventual rate increases “will probably be relatively slow,” depending on the economy’s progress and how financial markets react. A “mild” response “might encourage a somewhat faster pace,” Dudley said today to the New York Association for Business Economics. “If bond yields were to move sharply higher,” on the other hand, “a more cautious approach might be warranted.”

‘Nervous’

“Investors seem to be nervous and the market seems very reactionary right now,” Walter Todd, who oversees about $980 million as chief investment officer at Greenwood Capital Associates LLC, said by phone. “People are trying to get a handle on what exactly the Fed’s reaction function is on when they are raising rates. The problem for them there is I don’t know if they even know themselves.”

Three rounds of bond purchases by the Fed have helped send the S&P 500 up as much as 180 percent from a 12-year low in 2009. The gauge trades at 15.9 times estimated earnings, compared with a five-year average of 14.3 times, according to data compiled by Bloomberg.

The Chicago Board Options Exchange Volatility Index, a gauge for U.S. stock volatility known as the VIX, rose 4.4 percent to 12.96. The measure has lost 5.5 percent this year.

Nine out of 10 S&P 500 groups fell today, with phone and industrial shares tumbling at least 1.3 percent for the biggest declines. Retailers lost 1 percent as a group.

Retail Earnings

Staples slid 13 percent to $11.71 after posting first-quarter adjusted earnings of 18 cents a share. Analysts on average had projected 21 cents. The biggest U.S. office-supply chain also said sales will decline in the second quarter from a year earlier.

Urban Outfitters declined 8.8 percent to $32.98 after reporting first-quarter earnings of 26 cents a share, missing the 27-cent average projection of analysts in a Bloomberg survey. The teen-clothing retailer also said comparable sales were little changed for the quarter, versus a 0.3 percent gain that analysts predicted.

Dick’s Sporting Goods Inc. tumbled 18 percent, the most ever, to $43.60 after weak sales of golfing and hunting gear crimped its profit forecast. TJX Cos. fell 7.6 percent to $53.95 after cutting the top end of its full-year projection.

Home Depot

Home Depot Inc. rose 1.9 percent to $77.96 for the biggest gain in the Dow. While the company posted first-quarter profit that trailed some analysts’ estimates, Chief Financial Officer Carol Tome said it expects revenue lost due to the grim winter will be recouped this quarter.

Caterpillar lost 3.6 percent to $101.56. Global sales fell 13 percent in the three months through April compared with the same period a year earlier, Caterpillar said today in a filing. In the resource industries segment, sales fell 70 percent in the Asia-Pacific region and 68 percent in Latin America in the most recent period. Sales were also down 3 percent in North America and 45 percent lower in Europe, Africa and the Middle East.

The Dow Jones Internet Composite Index slipped 0.7 percent. The gauge rallied 2 percent over the previous two days, and is down 8.8 percent this year.

Amazon.com Inc. increased 1.5 percent to $301.19. Netflix Inc. advanced 2 percent to $371.67 for the largest gain in the S&P 500.

Carnival Corp. (CCL:US) climbed 0.9 percent to $39.18 after saying P&O Cruises Australia, one of its 10 brands, will add two ships to its fleet next year. That will bring the total to five, making it Australia’s biggest year-round fleet, the world’s largest cruise-line operator said in a statement. Morgan Stanley raised (CCL:US) its stock rating.

Ophthotech Corp. jumped 24 percent to $39.16. The drug developer granted Novartis AG the exclusive rights to commercialize its Fovista treatment in markets outside the U.S. Ophthotech said it may get more than $1 billion from the deal, including $200 million upfront and further payments if it reaches some targets.

To contact the reporter on this story: Callie Bost in New York at cbost2@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net Jeff Sutherland, Michael P. Regan


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Companies Mentioned

  • CCL
    (Carnival Corp)
    • $41.57 USD
    • -0.03
    • -0.07%
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