Volatile Week Ahead With the Start of Earnings Season, Fed Speakers on Tour and Even More Inflation Data

(Monday Market Open) It may be Columbus Day, but it’s not a day off for the markets, or for the Federal Reserve.

As people might be getting tired of Fed speakers, they’re front and center today as the first Q3 earnings week begins. And as geopolitical matters seem to be getting more complicated and crucial inflation data is expected throughout the week,  things could get volatile.

Fed Vice Chair Lael Brainard is scheduled to speak at 1:35 p.m. ET today at the National Association for Business Economics meeting in Chicago. Her topic? A sensitive one. The speech is called, “Restoring Price Stability in an Uncertain Economic Environment.” Last week featured a parade of Fed speakers all reading from the same hawkish hymnal. It would be surprising not to hear the same from Brainard.

Chicago Fed President Charles Evans also is scheduled to speak today.

Stock futures lacked direction overnight and traded near the flatline as the opening bell approached. Overnight action wasn’t too out of the ordinary. The dollar firmed up.

Potential Market Movers

Further escalation in Ukraine over the weekend could affect the markets in general and the commodities space in particular, especially grains. Also, reports of growing COVID-19 cases in China could weigh on shares exposed to that region.

The Treasury market is closed for Columbus Day, but rates rose overnight in Europe and Japan following the huge jump in U.S. rates late last week. The benchmark 10-year Treasury yield (TNX) closed out the old week close to 3.9%, up from lows below 3.6% earlier last week.

The Cboe Volatility Index®(VIX) was on the rise this morning, climbing above 32 to its highest level in a while. Resistance for VIX could be in the mid-30’s. A move through that level would put VIX near its May highs and likely be seen as bearish signal.

The CME FedWatch Tool started the week showing an 78.2% probability of a 75-basis-point rate hike at the close of the next Federal Open Market Committee meeting November 1-2. That’s compared with 81.1% on Friday and 59.5% a week ago. It looks like expectations are getting cemented for a fourth-straight 75-basis-point hike.

Chances of another 75-basis-point hike at the December meeting following one for November are only about 25%—but interestingly, that’s up from zero chance a week ago.

Minutes from the last Federal Open Market Committee (FOMC) meeting are due Wednesday.

Data-wise this week, get ready for nothing today with the government holiday. Things remain quiet tomorrow but pick up in a big way Wednesday with the September Producer Price Index (PPI) and Thursday with the Consumer Price Index (CPI).  Retail sales and Michigan consumer sentiment top off the week Friday.

Early analyst consensus from Briefing.com suggests we’ll see a 0.2% rise in both headline PPI and CPI, with core PPI rising 0.3% and core CPI up 0.4% from a month earlier. Any positive monthly numbers at this point could be read as bearish, because it means prices are still rising despite the Fed’s inflation-fighting efforts.

This week also marks the official start of Q3 earnings season. PepsiCo (PEP) kicks things off after the close tomorrow, following pretty strong showings recently from some smaller food and beverage companies.

Thursday marks the first mega-earnings day, featuring Walgreens Boots Alliance (WBA), Taiwan Semiconductor (TSM), Domino’s Pizza (DPZ), BlackRock (BLK), and Delta Air Lines (DAL). Then some of the big banks step up to the plate Friday morning. I’ll have a little more on that as the week advances.

From a technical perspective, levels to watch today for the S&P 500® (SPX) are 3,625 on the downside and 3,650 higher up.

Reviewing the Market Minutes

The S&P 500® (SPX) fell 2.8% to 3,639.66 on Friday, erasing most of the progress it had made during the rally Monday and Tuesday but staying above the nearly two-year low below 3,600 posted last week.

The Dow Jones Industrial Average® ($DJI) finished the day off 2.21% to close at 29,296.79, while the Nasdaq-100® (NDX) lost 3.9% to close at 11,039.47. The Russell 2000® (RUT) fell nearly 2.9%.

The 10-year Treasury yield ended Friday at 3.88%, up from lows below 3.6% earlier this week, while the U.S. Dollar Index (DXY) finished just slightly higher but closing in on 113.

Tech stocks were among the worst performers Friday, with semiconductors weak. The Philadelphia Semiconductor Index (PHLX) fell 6%, hurt partly by Advanced Micro Devices’ (AMD) warning of a Q3 revenue shortfall. The S&P 500 info tech sector (IXT) is down 20% from the peak of its July-August rally. That’s far worse than the 15% drop for the SPX since that date. 

Three Things to Watch

Earnings Preview: Earnings growth estimates keep slipping. The latest projection from research firm FactSet is for S&P 500 year-over-year earnings growth of 2.4% in Q3, down from the prior estimate of 2.8% and off dramatically from 9.9% on June 30. This would be the lowest earnings growth for a quarter since Q3 2020 and compares with the five-year average of 14.6% and the 10-year average of 8.8%.

Four of the 11 S&P sectors are expected to show earnings growth in Q3, led by energy and industrials. Seven sectors are expected to see Q3 earnings fall year-over-year, led by communication services and financials. Of the companies reporting Q3 earnings so far, 50% have cited a negative impact from foreign exchange, FactSet wrote.

P/E Thoughts: Wherever earnings ultimately end up (and historically the final S&P 500 earnings number tends to rise from the market’s projection going in), one metric to watch is the forward price-to-earnings (P/E) ratio. It currently rests at 15.8, according to FactSet, which is well below the five-year average of 18.5 and the 10-year average of 17.1 However, it’s above lows near 14 during the pandemic sell-off.

A lower-than-average P/E can be positive, implying that stock prices are relatively cheap. However, with so much uncertainty right now, “risk-on” isn’t the dominant mood. Mutual fund assets under management have been shrinking all year, though that’s partly a function of falling market capitalizations. Fund flows have been negative, too, according to Investment Company Institute (ICI). Fixed income might finally be getting more of a bid at current low levels, but last week’s late jump in Treasury yields doesn’t square with that. Instead, rising yields and falling stocks suggest more money is being moved completely to the sidelines.

Technically Speaking: One question some might be asking is whether the recent 2022 low SPX close of 3,585 set last month can hold. Sam Stovall, chief investment strategist at research firm CFRA, wrote in a report last week that the 3,200 area could represent the “ultimate low” for a variety of reasons. First, it represents an important Fibonacci retracement level of the bull market from March 23, 2020 to Jan. 3, 2022, he wrote. Also, the 33% decline that level would represent from the bull market high is in line with the average sell-off delivered by bear markets in recessions since 1948.

Notable Calendar Items

Oct. 11: Earnings from PepsiCo (PEP)

Oct. 12: September Producer Price Index (PPI) and September FOMC meeting minutes release

Oct. 13: September Consumer Price Index (CPI) and earnings from Delta (DAL), Domino’s (DPZ), Progressive (PGR), and Walgreen’s Boots Alliance (WBA)

Oct. 14: September Retail Sales, October Michigan Consumer Sentiment (early), August Business Inventories, and earnings from Citigroup (C), JPMorgan Chase (JPM), Wells Fargo &Co. (WFC), Morgan Stanley (MS), PNC Financial (PNC), U.S. Bancorp (USB), and UnitedHealth (UNH)

Oct. 17: October Empire State Manufacturing and earnings from Bank of America (BAC)

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, earnings from Abbott Labs (ABT), Procter & Gamble (PG), Biogen (BIIB), Travelers (TRV), Tesla (TSLA), Las Vegas Sands (LVS).

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

Image sourced from Shutterstock

This post contains sponsored advertising content. This content is for informational purposes only and not intended to be investing advice.