Stocks bounced back from last week's descent in what appears to be technical buying ahead of a massive crush of earnings, central bank meetings, and data over the next five days. McDonald's earnings today looked solid, but about one-third of S&P 500 companies report this week.
Major indexes bounce in premarket trading as crude oil retreats, McDonald’s earnings look strong
Market breadth in focus with less than 25% of S&P 500 stocks trading above 200-day moving averages
Week ahead brings Fed meeting, BoJ and BoE meetings, Apple earnings, and jobs data
(Monday market open) This week offers something for everyone as Wall Street licks its wounds after Friday’s plunge to fresh five-month lows. Major indexes bounced in premarket trading early Monday, helped by technical buying and a drop in crude oil prices, but remain squarely in correction mode down more than 10% from 52-week highs.
The days ahead include a Federal Reserve meeting, along with rate decisions from the Bank of Japan (BoJ) and Bank of England (BoE). Apple (AAPL) reports earnings, along with nearly one-third of S&P 500 firms. Perhaps most importantly, Friday will dawn with data on October jobs growth following job openings and U.S. manufacturing health updates. Geopolitics are in the mix, too, as fighting in the Middle East continues.
Wednesday morning is also when the Treasury Department will announce its anticipated borrowing needs for the coming three months. This could have an impact on the Treasury market as heavy supply remains front and center, helping push yields to 16-year highs.
The packed schedule may spark volatility despite a lack of mystery surrounding the central bank meetings. Analysts build in slim to no chances of rate hikes, though the BoJ could potentially rattle markets with adjustments to its yield curve control policy (see more below). For the Fed, a pause is likely when it announces its decision Wednesday afternoon, according to futures trading. Still, Fed Chairman Jerome Powell might signal chances of one more rate hike—perhaps before year-end—if data warrant.
Central banks could yield the spotlight (no pun intended) to earnings. More than 160 S&P 500 companies report this week, making this the busiest five-day stretch of the season. Apple leads the pack in market capitalization, but other companies aren’t exactly small and include McDonald’s (MCD), DuPont (DD), Humana (HUM), Kraft Heinz (KHC), Caterpillar (CAT), Starbucks (SBUX), Advanced Micro Devices (AMD), Amgen (AMGN), Pfizer (PFE), Qualcomm (QCOM), and Roku (ROKU)
“Clearly, market breadth and earnings are in command right now,” says Kevin Gordon, senior investment strategist at Schwab. “Breadth hasn’t shown any signs of improvement, given only 25% of S&P 500 members are trading above their 200-day moving average. Even on the days we’ve seen some nice bounces, the number of advancing stocks has not been outpacing the number of declining stocks by a significant degree. Sentiment has gotten to a pessimistic zone that is typically considered ‘supportive’ for stocks, but you need a catalyst to get you there. Right now, we are lacking one.”
McDonald’s (MCD) once said, “You deserve a break today.” Investors might have had a break from pre-market reports this morning if it weren’t for McDonald’s. It’s the only major S&P 500 firm reporting before the open. Investors are apparently loving it, as shares gained 3% in premarket trading following the results. The fast-food company beat analysts’ earnings estimates and said global same-store sales rose 8.8%. That was better than analysts had expected, as well, but it’s unclear how much pricing had to do with the increase.
McDonald’s reported after Chipotle’s (CMG) shares climbed 4% Friday following earnings. One takeaway was that customers are not balking at higher prices. That contrasts with reports from other companies about customers pushing back either by filling carts less or choosing lower-end products, something Amazon (AMZN) observed last Thursday.
We’re about halfway through reporting season and so far, 47% of companies beat analysts’ revenue estimates and 78% beat earnings estimates, according to Bloomberg.
Apple is expected to report Thursday afternoon, making it nearly the last “mega-cap” company to open its books. The recent launch of the iPhone 15 could be a highlight, along with updates on Apple’s China business, which faces phone competition and political challenges. Apple’s revenue is down year-over-year three quarters in a row, and analysts expect quarterly revenue to fall 6% on average from the same quarter last year when it reports.
Mega-cap tech earnings are a “mixed bag so far,” says Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research. “The bias has been to ‘sell the news’ even for those that are beating estimates, including Microsoft (MSFT).”
Analysts now expect Q3 S&P 500 earnings growth of 2.7%, according to FactSet, up sharply from their average estimate of -0.3% at the end of September. That puts Q3 on track to be the first quarter of annual earnings growth in a year. Eight of 11 sectors are reporting year-over-year earnings growth, led by communication services, consumer discretionary, and financials, FactSet said.
Week Ahead: This week provides insight into the manufacturing economy with tomorrow’s October Chicago Purchasing Managers’ Index (PMI) and Wednesday’s October Institute for Supply Management (ISM) Manufacturing Index.
The September Job Openings and Labor Turnover Survey (JOLTS) comes Wednesday after August’s tally topped expectations. But the data highlight will likely be Friday’s October Nonfarm Payrolls report. Consensus is for 172,000 new jobs, down sharply from 336,000 in September, Trading Economics says.
The BoJ’s two-day meeting ends tomorrow with 76% of economists surveyed by Bloomberg expecting no change to its policy. “The odds that a change comes sooner than 2024 have increased recently, as the yield on the 10-year Japanese government bond continues to rise, along with the global trend,” says Michelle Gibley, director of international research at Schwab. “Economists expect a widening of the yield curve control (YCC) ceiling beyond 1.0% as the first step, although a rate hike is a possible alternative.”
Stay up late: October Chinese factory data hit the wire tonight, U.S. time. The official NBS Manufacturing PMI is expected to remain in expansionary territory for the second straight month at 50.4, according to Trading Economics. A reading of 50 or above indicates expansion, and the September figure was 50.2.
Early today, futures trading pegged chances at 98.6% that the Federal Open Market Committee (FOMC) will hold its benchmark funds rate at the current 5.25% to 5.50% target range following this week’s meeting, according to the CME FedWatch Tool. Chances of rates staying on pause following the FOMC’s December 12 meeting are 79.1%.
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Price check: The forward 12-month price-to-earnings (P/E) ratio for the SPX has dropped to 17.1, below the five-year average of 18.7 and the 10-year average of 17.5, according to FactSet. It was above 20 in early August when the SPX hit its 2023 peak, but a lower P/E doesn’t necessarily mean stocks can be considered cheap. The benchmark 10-year Treasury note yield remains just under 5%, potentially a drag on future earnings growth. Also, 5% yields mean fixed income poses tough competition for stocks. Geopolitical tension appeared to draw investors back toward perceived safety in Treasuries and the dollar late last week, perhaps one reason the 10-year yield didn’t seriously test 5% again despite strong U.S. economic data.
Amazon delivers: Most of last week, investors punished companies that delivered strong earnings but softer-than-expected outlooks. Then came Amazon. The company’s Q4 revenue guidance of between $160 billion and $167 billion was below analysts’ estimates, and Briefing.com called it “disappointing.” Even so, shares rang up 8% gains by midday Friday, raising the question: What makes Amazon different? You could argue that its results outpaced expectations by so much that to many investors, guidance became less important. Amazon had projected Q3 operating income of $5.5 billion to $8.5 billion but blew that away with an actual figure of $11.19 billion—an astonishing 343% year-over-year increase. That could explain why its Q4 guidance didn’t derail shares. We’ll have to come back in January and see if Amazon rocketed past its own expectations again or if investors put too much faith in its past ability to do that.
Talking technicals: The S&P 500® Index (SPX) broke below the bottom of a channel on the charts near 4,169 last week, which technicians say could set it up for further losses. The next technical support is near 4,050, which represents the 50% Fibonacci retracement level from the October 2022 low. “Near-term, the market is oversold, so it’s possible we could get a reflexive bounce any day, even though there was a lot of technical damage last week,” Schwab’s Peterson says. The small-cap Russell 2000 (RUT) fell below 1,650 technical support last week to new two-year lows. It’s in danger of dropping under 1,600 for the first time since early November 2020.
Oct. 31: CoreLogic Case-Shiller Home Price Index and October Consumer Confidence. Expected earnings from Cadence Design (CDNS), Caterpillar (CAT), Amgen (AMGN), Pfizer (PFE), Advanced Micro Devices (AMD), and Nucor (NUE).
Nov. 1: October ISM Manufacturing, September Job Openings and Labor Turnover Survey (JOLTS), September Construction Spending, Fed rate decision, and expected earnings from DuPont (DD), Humana (HUM), Kraft Heinz (KHC), American International (AIG), McKesson (MCK), PayPal (PYPL), Qualcomm (QCOM), and Roku (ROKU).
Nov. 2: September Factory Orders and expected earnings from ConocoPhillips (COP), and Apple (AAPL).
Nov. 3: October Nonfarm Payrolls, October ISM Non-Manufacturing Index, and expected earnings from Cardinal Health (CAH).
Nov. 6: No major earnings or data expected.
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