Tug of War: Can Stronger-Than-Expected Earnings Outweigh Rising Yields?

(Wednesday Market Open) Treasury yields held up a “stop” sign Wednesday after a two-day rally as investors awaited Tesla (TSLA) earnings this afternoon.

The 10-year Treasury yield (TNX) drove uphill this morning to 4.1%, near 2022 highs. The move helped snuff out initial overnight stock market gains despite a strong showing late yesterday from Netflix (NFLX).

Trading was volatile overnight, and the Cboe Volatility Index®(VIX) rose this morning back above 31. It would likely have to fall below 30 to provide a tailwind.

Hotter-than-expected inflation data from England earlier today appeared to pressure bond futures, causing yields to rise, but the drop in stock futures took a while to develop, so it’s unclear if stock market weakness is directly related to the inflation news.

Earnings have mostly come in better than expected so far, especially for the big companies that really matter to the market as a whole, so it will be interesting as today’s session develops to see if strong earnings can outweigh rising yields in the minds of investors.

Potential Market Movers

In the headlights today is TSLA, which reports after the close. The company said earlier this month that Q3 deliveries hit a record 343,000, but that was below Wall Street’s expectations. One thing to watch for today is whether that number gets adjusted.

Another thing is to see what TSLA CEO Elon Musk says about his plans for Twitter TWTR. Musk has confirmed he’ll be on the earnings call, so that could make it worth a listen. TSLA has also been dealing with issues related to China’s COVID-19 lockdowns.

After the close Tuesday, Netflix NFLX blew past expectations by adding 2.41 million new subscribers in Q3 instead of the one million it projected. That, along with better-than-expected quarterly financial results, sent shares of the streaming company up 13% ahead of the opening bell. Strength in NFLX appears to be spilling over into the tech sector early Wednesday.

Procter & Gamble PG beat Wall Street’s earnings expectations this morning and saw shares gain slightly.

With PG, it was notable that much of the company’s organic sales increase reflected a 9% increase from higher product prices, with results partially offset by a small drop in shipping volumes.

If companies can pass on higher costs to customers and customers keep shopping, the companies can maintain their margins. That’s called pricing power. For PG to raise prices as much as it did and see only a small drop in volume is another sign the consumer is in pretty good shape. Everything we’ve seen in earnings reports so far has suggested that.

But let’s now turn to the Federal Reserve, which is likely taking note as it’s been trying to slow down demand. If consumers are absorbing big price hikes on staple goods, the Fed may continue to go big with rate hikes. Speaking of the Fed, noted “dove” Neel Kashkari, president of the Minneapolis Fed, was quoted by Reuters yesterday saying the Fed might have to raise rates above 4.75% to fight inflation.

Housing data this morning looked mixed. Housing starts for September were a bit below the market’s consensus expectations, but building permits were higher than expected.

Earnings First, Data Second

Solid earnings are starting to crowd out unsupportive economic data as far as the market is concerned. Tuesday morning was a good example. Stocks didn’t pause from an early earnings-fueled rally despite September Industrial Production and Capacity Utilization numbers that might have dinged the market’s pre-earnings season.

The 0.4% rise in September Industrial Production compared with a revised negative 0.1% in August. It also was above the consensus Wall Street estimate for 0.1% growth, according to Briefing.com. Capacity Utilization also rose from August and is near pre-pandemic levels.

The positive takeaway from the two reports, and maybe the reason markets shrugged them off, was a 0.6% decline in production of consumer goods at an annual rate in Q3, representing a big slowdown from 3.1% growth in Q2. That’s the kind of nugget the Federal Reserve might be looking for.

Speaking of consumer goods, shares of Target TGT moved higher Tuesday after the retailer got an analyst upgrade. TGT remains only a bit above recent two-year lows, but it’s possible some investors will see the weakness as a buying opportunity. Consumers seem healthy going into the holiday season, which may be one aspect of the more bullish feelings around TGT.

Reviewing the Market Minutes

Tuesday was the second straight banner day for major indexes as earnings kept looking solid. The benchmark S&P 500® (SPX) climbed 1.14% to 3,719.98. It was the first close above 3,700 since October 6.

The Dow Jones Industrial Average® ($DJI) gained 337.98 points, or 1.12%, to close at 30,523.80. The Nasdaq-100® (NDX) climbed a bit less with gains of 0.77%, while the Russell 2000® (RUT) added 1.16%.

Looking over the sectors, it was a sea of green Tuesday. Every sector rose, led by industrials, materials, and utilities. It’s good to see industrials and materials up in front, because those sectors tend to do better in a healthy economy. However, they’ve generally done well (compared with others) over the last three months, which might raise concerns about whether the Fed’s rate policy is slowing economic growth.

United Airlines (UAL) took off after the close, following a solid earnings report. Revenue actually rose 13% from the same period in 2019, pre-pandemic. Travel has been a bright spot, overall, especially airlines. They’ve been able to keep ticket prices high without seeing a loss of demand.

CHART OF THE DAY:  MID-CHANNEL SPX RESISTANCE. Where is the technical resistance for the SPX (candlestick)? Possibly down the middle of the channel defined by the two red lines in the chart above, meaning it is close to current levels. The 50-day moving average is up around 3,900, but technicians don’t see major resistance there. Data Source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Going virtual: It looks like virtual reality has yet to translate into actual success for Meta Platforms (META). Recently, The Wall Street Journal reported that nearly a year after Facebook rebranded as META, its flagship Horizon Worlds metaverse offering for consumers is falling short of internal performance expectations. Meta initially set a goal of reaching 500,000 monthly active Horizon Worlds users by the end of this year, but in recent weeks, it lowered that figure to 280,000. Less than 200,000 are on the platform today. The unappetizing media report didn’t appear to bother investors as META shares rose sharply Monday before pulling back Tuesday.

Assessing the Rally: Sometimes there’ll be a rally like the one we had Monday and Tuesday, but with low volume, meaning the overall commitment wasn’t that great as many stayed on the sidelines. That sort of rally sometimes lacks staying power. We’re not saying this one can last–and stock index futures turned lower overnight—but it’s encouraging to note it was broad-based across all sectors and featured higher-than-average volume. Both of those factors tend to give rallies a better chance to last more than a day or two. Also, analysts saw evidence of short-covering and technical buying Tuesday, which could mean some bears are starting to throw in the towel. Again, a day doesn’t represent a trend. We’ll have to see if more of that spills over into today’s session.

Two things argue against the rally making much more progress. First, the 10-year Treasury yield (TNX) remained above 4% much of Tuesday. Some technicians think the recent high of 4.1% may be resistance, and a push above that might hurt stocks. Second, the Cboe Volatility Index®(VIX) remains above 30. It would likely have to fall below 30 to provide a tailwind.

Happy anniversary: For those who love dubious dates, tomorrow marks 35 years since Black Monday, the stock market crash that took the $DJI down 22.6%. It’s still the biggest single-day percentage loss for that index. In the immediate aftermath, most of the blame fell on computer-driven trading models of that era that sped up selling as nervousness spread throughout global markets. Then as now, there were warnings. By August 1987, the Dow had gained 44% for the year, but by October, rolling sell-offs began and accelerated by mid-month after bad trade numbers rattled the dollar. The Federal Reserve’s own history recalls Friday, October 16 as a triple-witching day that ended up costing the Dow 4.6% of its value. We’ve certainly seen some volatile Fridays recently.

Notable Calendar Items

Oct. 20: September Existing Home Sales, Philadelphia Fed Index, and earnings from Alaska Air (ALK), American Airlines (AAL), AT&T (T), Dow (DOW), Whirlpool (WHR), and CSX (CSX)

Oct. 21: Earnings from American Express (AXP), Schlumberger (SLB), Nokia (NOK), Blackstone (BK), and Verizon (VZ)

Oct. 24: Earnings from Royal Philips (PHG) and Northwest Bancshares (NWBI)

Oct. 25: October Consumer Confidence and earnings from Archer-Daniels (ADM), Biogen (BIIB), General Electric (GE), General Motors (GM), Microsoft (MSFT), Alphabet (GOOGL), Texas Instruments (TXN), and Visa (V)

Oct. 26: September New Home Sales and earnings from Boeing (BA), Boston Scientific (BSX), Kraft Heinz (KHC), and Waste Management (WM)

Oct. 27: Q3 Gross Domestic Product, September Durable Goods, and earnings from Apple (AAPL), McDonald’s (MCD), Caterpillar (CAT), MasterCard (MA), Southwest (LUV), Merck (MRK), and Altria (MO)

Oct. 28: September Personal Income, Personal Spending, and Personal Consumption Expenditure (PCE) Prices, October Consumer Sentiment, and earnings from AbbVie (ABBV), Aon (AON), Chevron (CVX), and ExxonMobil (XOM)

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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