Solid Start: Week Begins in the Green After Bank of America Earnings Impress, Yields Fall

(Monday Market Open) Falling Treasury yields, hopes for improved stability in the U.K., and early strength in mega-cap stocks gave the market an initial boost Monday. But don’t get too comfortable. Everyone’s seen the wild swings lately, and volatility remains high with lots of major earnings to get through this week.

The 10-year Treasury yield (TNX), which closed last week above 4%, dipped back below 3.95% early Monday, and the British pound (/6B) moved higher as the new U.K. finance minister canceled most of the tax cut plan that worried markets last week. Still, it’s doubtful we’ve heard the last of this particular story.

Overall, there appears to be more “risk-on” sentiment to start the new week.

Potential Market Movers

Bank earnings continue today with Bank of America BAC reporting. Like JPMorgan Chase JPM, BAC is closely tied to the consumer economy, so its quarterly results and outlook will likely provide more details about how consumers are dealing with high inflation and interest rates.

Investors appeared to like BAC’s results at first glance. Shares of BAC rose ahead of the opening bell, and results beat analysts’ consensus. BAC reported higher net interest income and strong bond market trading, though like other banks BAC had to add more money to its loan loss reserves for security against possible loan defaults.

Otherwise, today might offer a bit of a breather after a last week’s sprint. There’s not much data due, and the earnings calendar is pretty quiet beyond BAC. Things pick up in a big way tomorrow with expected earnings from Goldman Sachs GS, Johnson & Johnson JNJ, Lockheed Martin LMT, and Netflix NFLX.

The main data today was October Empire State Manufacturing, which fell more than expected.

Tomorrow also offers a glance into the manufacturing economy. Investors will have an eye on September Industrial Production and Capacity Utilization, both due near the opening bell. Industrial production fell 0.2% in August after a 0.5% drop in July, while August capacity utilization stood at 80%. Motor vehicle assemblies grew in August and may be worth tracking for insight into consumer demand.

The major data to watch for later this week is September Housing Starts and Building Permits Wednesday morning. August’s data showed surprising strength in starts but weakness in permits, which could suggest the robust starts numbers can’t be sustained, especially with rising mortgage rates and declining homebuilder sentiment, according to Briefing.com.

The average 30-year mortgage rate climbed to 6.92% last week, according to Freddie Mac. That’s up from 5.66% at the end of August and is the highest since April 2002.

Housing permits is a key leading indicator for the housing market, so take a close look at that one. However, if all housing reports beat expectations, we may see another one of those “good news is bad news” scenarios for the market.

In one noteworthy item this morning, natural gas (/NG) is coming off of some highs, down 7% to new three-month lows. That could be a support factor the European side of the market, where energy prices have skyrocketed since the Russia-Ukraine war began.

Also overseas, China took some actions over the weekend to spur growth there, which could be helping some of the major U.S. growth names. Apple (AAPL), Alphabet (GOOGL), and Microsoft (MSFT) were all solidly higher ahead of the opening bell.

Get Set for Heavy Earnings Schedule

Throughout the week, major firms expected to report include AT&T (T), American Airlines (AAL), Lockheed Martin (LMT), Netflix (NFLX), Philip Morris (PM), Goldman Sachs (GS), Union Pacific (UNP), Abbott Labs (ABT), Tesla (TSLA), Procter & Gamble (PG), United Airlines (UAL), Verizon (VZ), and American Express (AXP).

As a reminder, Wall Street’s Q3 earnings growth expectations have declined from nearly 10% at the end of Q2 to less than 3% now. That means the bar is low, so investors might not want to get too enthusiastic about earnings “beats” unless they’re really above and beyond. On the other hand, companies that fail to meet the low bar could see their shares get punished even more than usual.

About 7% of S&P 500 companies have reported Q3 earnings results through last Friday. Of those, 69% have reported a positive earnings-per-share surprise and 67% have reported a positive revenue surprise, according to market research firm FactSet. However, FactSet now projects Q3 earnings growth of just 1.6%, down from 2.8% at the end of September. This would be the weakest quarterly earnings growth in two years.

The Federal Open Market Committee (FOMC) meets November 1-2, and the market is now pricing in  a 96% chance of a fourth-consecutive 75-basis-point rate hike, according to the CME FedWatch Tool.

Higher rates make it harder for companies to borrow, potentially slowing economic activity and raising the risk of recession. Commodity and metals futures prices fell broadly Friday as traders appeared to price in more recession fears. WTI Crude fell nearly 4%, and copper—a metal used in many industrial applications—fell 1%.

Reviewing the Market Minutes

Last Thursday’s huge comeback might have been based in part on falling U.K. bond yields. On Friday, U.K. bond yields ticked back up, and the U.S. stock market came under pressure. Correlation isn’t causation of course, but there you have it.

If you don’t usually follow the U.K. bond (or “gilt”) market, it might be a good idea to start doing that now. There’s a lot of concern about possible rockiness in the U.K. economy as the nation is now on their fourth finance minister in four months.

Another item weighing on stocks last Friday was a rise in consumer inflation expectations seen in the preliminary October University of Michigan Sentiment report. One-year inflation expectations rose to 5.1% from the previous 4.7%, and five-year expectations increased from 2.7% to 2.9%. Despite that, sentiment rose slightly from September.

The SPX fell about 86 points, or 2.37%, to finish Friday at 3,583.07. The Dow Jones Industrial Average® ($DJI) backtracked 403.89 to 29,634.83. The SPX fell about 1.4% this week and finished only a few points above Wednesday’s two-year low close. It’s been lower four of the last five weeks. But the $DJI actually rose slightly for the week.

The Nasdaq-100® (NDX) fell Friday and posted weekly losses, while the Russell 2000® (RUT) also had a week in the red.

The benchmark 10-year Treasury yield (TNX) closed above 4% on Friday, which also appeared to provide pressure on stocks. The 4% level represented psychological resistance for TNX.

All the SPX sectors fell Friday, and consumer discretionary and energy shares took the worst of it. Health care, financials, and utilities did best, but all were in the red.

Among individual stocks, Beyond Meat (BYND) slid Friday. Shares fell 9% after BYND said it’s cutting 19% of its workforce as it’s struggling with falling sales and inflation. Electric car companies Tesla (TSLA) and Lucid (LCID) also fell sharply. Higher inflation expectations tend to hurt consumer-oriented stocks.

Despite stock market losses, the Cboe Volatility Index® (VIX) didn’t show much muscle Friday, continuing its range-bound ways. It’s mostly been between 30 and 33 over the last week, and hung out near 31.3 early today. The VIX might have to move toward the mid-30’s or above for stocks to fall out of bed much further. But anything above 30 is high versus the long-term average near 20.

Three Things to Watch

Happy Travels: Airline earnings continue this week, with United Airlines (UAL) and American Airlines (AAL) expected to report. This comes as the Dow Jones Transport Average ($DJT) appears to be resisting the heavy selling that’s taken hold of so much of the recent consumer surveys, which show heightened interest in travel, and that’s one possible reason some large airline stocks have leveled out a bit in recent weeks. Last week’s strong Q4 forecast from Delta (DAL), the first big airline to report, seems to have lifted sentiment in the industry. Strength in international travel out of the United States could be a function of the strong dollar, which makes destinations like Europe more attractive for U.S. travelers. Tourism is a big part of the European economy, so this increased travel interest could provide a boost. Still, airlines have yet to reach the capacity levels they saw before the pandemic. Some industry analysts think that might not happen until next summer. Watch AAL and UAL earnings to see if they can provide a higher-level view.

Upstream Swim for NFLX? Tomorrow afternoon, (NFLX) is expected to be the first “FAANG” company to post Q3 earnings. It’s been a tough year for the company, which bled subscribers by around 200,000 in Q1 and almost 1 million in Q2. In July, NFLX told investors it expected to add a million subscribers in Q3. One challenge NFLX pointed out last quarter is that nearly 60% of its revenue comes from overseas, making the strong dollar a fierce headwind for the company. At the time, it forecast 5% revenue growth in Q3, but said that would be 12% on a constant-currency basis. The greenback’s historic highs also could hurt the company’s operating margin and operating profit growth, NFLX said then. The dollar situation has only gotten worse since NFLX last reported in mid-July, which could make it harder for the company to meet its goals. And even if it gains 1 million subscribers as it hopes, that compares with a gain of more than 4 million in Q3 last year.

Inflation and GDP: Don’t forget that as inflation climbs and the Fed fights back with rate hikes, the federal government’s interest payments on debt will also climb. Higher rates make all debt, including Washington’s, more expensive to service. This means the government could have less to spend on everything else, including defense, science, health care, social programs, and infrastructure. Keep an eye on the federal budget as Washington wrestles with rising debt service costs. If it needs to cut elsewhere to make those interest payments, there could be a negative impact on gross domestic product (GDP). Government spending made up 44% of GDP in 2020, according to Trading Economics. If some of that spending gets diverted from traditional areas that help drive GDP, it could be bad news for economic growth and for companies that get a big chunk of their revenue from government contracts, such as the defense and agriculture industries.

Notable Calendar Items

Oct. 18: September Industrial Production, September Capacity Utilization, and earnings from Goldman Sachs (GS), Johnson & Johnson (JNJ), Lockheed Martin (LMT), United Airlines (UAL), and Netflix (NFLX)

Oct. 19: September Housing Starts and Building Permits and earnings from Abbott Labs (ABT), Procter & Gamble (PG), Biogen (BIIB), Travelers (TRV), Tesla (TSLA), and Las Vegas Sands (LVS)

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)

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

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