Pendulum Swings: Markets Recover Slightly After Friday's Anxious Trading, But Middle East Worries Dominate

(Monday market open) Last week gave us a taste of earnings. The meal starts tomorrow and picks up steam as banks, airlines, and health care companies report. And the main course might be Wednesday afternoon when Netflix NFLX and Tesla TSLA open their books. Major stock indexes crept higher in premarket trading Monday as some of Friday’s “risk-off” sentiment dissipated.

This earnings season is critical for perspective on market valuations and on whether a so-called soft economic landing is possible. Reports and forecasts could provide investors a better sense of consumer and business demand and shed light on the effect of high rates. Inflation’s impact is another important metric.

As reporting continues, company shares could get punished if they beat estimates mainly through cost cuts and price hikes. There’s a sense that Wall Street wants to see companies grow their business long term rather than through one-time adjustments.

Stocks inched higher last week for the second week in a row despite Friday’s losses. Generally, risk-off sentiment holds sway as investors contemplate high yields, the surge in crude oil, and geopolitical concerns. Energy and aerospace stocks were among the leaders last week, supported by those same fears. Defensive utilities also had a good week, but consumer discretionary brought up the rear. Technology struggled on Friday. Small-caps struggled.

Treasuries could again have a big impact in coming days, evident in the market’s pullback late last week, when the 10-year yield hit 4.7% after warm inflation data. Still, geopolitical worries could draw a flight to safety trade, pressuring yields. Some of the “risk-off” signals that flashed late last week appeared to dim early Monday as Treasury note yields jumped while volatility and gold stepped back.

Morning rush

• The 10-year Treasury note yield (TNX) rose 5 basis points to 4.7%.
• The U.S. Dollar Index ($DXY) inched lower to 106.4.
• Cboe Volatility Index® (VIX) futures fell to 18.6.
• WTI Crude Oil (/CL) was steady at $87.52 per barrel.

Crude oil remains near last week’s highs amid concern that tensions in the Middle East could widen. Any sign of the current conflict becoming more regional would likely strengthen crude oil and possibly the dollar and Treasuries.

What to watch

Week ahead: October’s Empire State Manufacturing from the New York Federal Reserve fell into negative territory at -4.6, from +1.9 in September. Consensus had been -4, according to Briefing.com. “Contracting new orders and expanding employment aren’t a good mix for productivity,” says Kevin Gordon, senior investment strategist at Schwab, commenting on the data. A negative reading for Empire State Manufacturing implies contraction in manufacturing activity in the state of New York.

Things accelerate tomorrow morning with September Retail Sales. This could help verify whether consumer activity slowed recently, as some analysts believe based on recent credit card activity. Headline growth, however, could be influenced by high gas prices that month. Retail Sales popped 0.6% in August, but analysts expect a pullback in September to just 0.2% (the lowest since June) and 0.1% excluding autos, according to Trading Economics.

Home brew: Existing Home Sales, Housing Starts, and Building Permits come later this week. Home builder stocks are down sharply from summer peaks, but demand for new homes remains resilient due to low existing home stocks.

Stocks in spotlight

Eleven of 12 S&P 500 companies reporting last week beat analysts’ estimates for earnings per share, so the season is off to a solid start. Research firm FactSet now sees 0.4% S&P 500 earnings growth in Q3, up from its September 30 estimate of -0.3%. If it’s 0.4%, this will be the first quarter of year-over-year earnings growth since Q3 2022. About 6% of companies have reported.

After 55 S&P companies report this week, we’ll be 17% of the way through earnings season.

Big banks dominate this week, including Bank of America BAC and Goldman Sachs GS tomorrow and Morgan Stanley MS on Wednesday. Some regional banks also report, shifting focus toward the lending and deposit picture in a sector hard hit last spring when several small banks failed. Two smaller banks on tap this week are Regions Financial RF, Zions Bancorporation ZION, Huntington Bancshares HBAN, and Northern Trust NTRS.

Friday’s tidings from JPMorgan Chase JPM, Citigroup C and Wells Fargo WFC were generally solid and sent shares higher. However, executives sounded concern both in press releases and calls with analysts, warning of slowing consumer demand as people run low on post-pandemic savings and as interest rates remain high. They also worry about global politics. “We’re facing so many uncertainties out there,” said JPMorgan Chase’s CEO Jamie Dimon, quoted by Bloomberg.

One uncertainty, Bloomberg reported, is a chance of higher capital requirements that could clip banks’ credit card and trading businesses. Bank of America is one of the top-five credit card issuers, so investors might want to hear if executives weigh in on that regulatory issue. Potential credit losses are another item to monitor as banks report (see more below).

Wednesday afternoon brings Tesla and Netflix, two of the most closely followed “mega-cap” stocks. There’s a sense that earnings from tech and communication services—particularly mega-caps—might have the most impact on Wall Street this reporting season because of their heavy weightings and their rallies earlier this year, Barron’s reports.

Consumer staples is another area to watch for earnings this week. The sector has struggled this year. Two major credit card firms also report.

Tesla’s earnings come just days after Cox Automotive’s Q3 U.S electric vehicle (EV) sales report showed a record of approximately 313,000 units sold, up nearly 50% year-over-year. Tesla enjoyed 19.5% unit growth on an annual basis, but its share of the EV market fell to 50%, from 63% in Q3 of 2022.

United Airlines UAL and American Airlines AAL both report this week, along with CSX CSX and Union Pacific (UNO). Abbott Labs ABT and Johnson & Johnson JNJ are also on deck.

Most of the biggest info tech and communication services firms don’t begin reporting until next week. In the meantime, however, shares of Apple AAPL fell in premarket trading after Bloomberg reported that sales of the new iPhone in China have been disappointing. U.S. sales, on the other hand, look strong, the Bloomberg article said, quoting market researchers.

Eye on the Fed

Early today, the probability that the Federal Open Market Committee (FOMC) will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was 10%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 33%. Futures trading builds in about a 50% chance that the Fed’s first rate cut could occur by its June 2024 meeting.

The Fed speakers calendar begins this afternoon with Philadelphia Fed President Patrick Harker. Fed Chairman Jerome Powell is scheduled to speak around midday Thursday at a conference. Then the Fed’s pre-meeting “quiet period” starts Friday.

CHART OF THE DAY:   ALL OVER THE MAP. It’s been a whipsaw year for both the dollar (DXY-candlesticks) and gold (/GC-purple line). The dollar’s recent strength weighed on gold, but now gold is making a slight comeback as geopolitical concerns rise. Data sources: ICE, CME Group. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Credit score: Investors will watch how much, if anything, banks add to provisions for credit losses. More capital set aside indicates increased fears of loan default, which could also weigh on earnings. The biggest three banks reporting Friday didn’t add much to loan loss provisions, but they’d set aside quite a bit for that earlier this year. Wells Fargo, in its call, noted weakness in the office part of the real estate portfolio and expects losses to pick up there over time, Bloomberg reported. Commercial real estate is considered particularly vulnerable to high interest rates and was already under pressure from the work-at-home trend. Smaller regional banks tend to have the most exposure in this category, and high-yield loan spreads widened recently, suggesting tightening credit. If this accelerates, the impact could be felt by businesses with fewer employees that need credit to grow. Most U.S. jobs are created by small businesses, and small businesses employ nearly half of all U.S. workers, Forbes reported. “The move up in spreads has been relatively widespread, but consumer cyclical industries have gotten hit the hardest,” says Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research.

Consumer flop: Analysts expected a backtrack for preliminary October University of Michigan Consumer Sentiment, but what they got Friday was more dramatic. The headline of 63.0 was the worst since May and compared with expectations of 67.5. Even worse, those surveyed were less confident about the economy’s future and more worried about inflation. Stocks slid on the data, but it’s worth a grain of salt because rising gas prices likely took some starch out of consumer optimism. Even so, Friday’s survey closely followed higher median inflation expectations reported last week by the New York Federal Reserve in its survey. The Fed focuses on keeping inflation expectations checked, fearing a “wage-price” spiral where inflation worries translate to stronger wages and higher prices. Strikes across many industries recently reflect growing wage demands. Last week’s inflation data and expectations reinforce ideas the Fed could keep rates higher for longer.

Copper top: Copper futures (/HG) hit seven-month highs in January above $4.35 a pound, stumbled last spring when recession fears gathered, and then enjoyed a summer rally. Those warm days are long gone, and so is the industrial metal’s sizzle as front-month futures recently languished near $3.60, just above spring lows. With crude oil prices surging on production and geopolitical fears, it’s odd to see industrial metals like copper and aluminum sag, though recent firmness in the U.S. dollar could help explain why. Metals and the dollar have an inverse relationship. Lower metals prices also might speak to softness in major economies, including Europe and China. Weak metals potentially hurt materials-sector stocks, but could boost tech and industrials, whose companies use those metals in their products. It’s possible those firms might enjoy margin help from lower input costs if low prices last, and a long-term drop in commodity prices might help ease inflation.

Calendar

Oct. 17: September Retail Sales, September Industrial Production, September Capacity Utilization, and expected earnings from Lockheed Martin (LMT), Bank of America (BAC), Goldman Sachs (GS) Johnson & Johnson (JNJ) and United Airlines (UAL).

Oct. 18: September Housing Starts and Building Permits, and expected earnings from Abbott Labs (ABT), Morgan Stanley (MS), Procter & Gamble (PG), Travelers (TRV), Netflix (NFLX), and Tesla (TSLA).

Oct. 19: Initial Jobless Claims, September Existing Home Sales, September Leading Economic Indicators, and expected earnings from American Airlines (AAL), AT&T (T), Philip Morris (PM), Union Pacific (UNP), and CSX (CSX).

Oct. 20: Expected earnings from American Express (AXP) and Regions Financial (RF).

Oct. 23: No major earnings or data expected.

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

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