British PM Quits, Overshadows Solid U.S. Earnings News - American Airlines Group (NASDAQ:AAL), Applied Ma

(Thursday Market Open) Rates are taking off and British Prime Minister Liz Truss just resigned, shifting focus from positive earnings news that’s provided support. With that news arriving before the open, stock index futures backtracked slightly and yields climbed again.

That said, results from major companies close to the pulse of the economy continued to impress.

Before the U.K. news, Treasury yields (and politics) took a backseat to earnings this morning as most of the major companies close to the pulse of the economy continued to impress.

We’ve talked about corporate guidance being critical this quarter, and from what we’re seeing so far, there appears to be a divergence between what analysts were putting out there and what we’re hearing from companies. There’s still a long way to go, but analysts may have gotten too pessimistic. They may ultimately have to revisit some of the price target cuts they’d been making.

Seeing such solid earnings from companies like IBM (NYSE:IBM), American Airlines (NASDAQ:AAL), and Union Pacific (NYSE:UNP) sets the tone for a potentially positive earnings season. It also provides evidence of resilience in the economy even as many worry a recession is still ahead. Consider UNP, for instance. Its earnings report showed an improvement in the pace of goods moving around the country, a sign that maybe we’re getting past we’re finally getting past the frustrating supply chain issues we’ve faced for nearly three years.

On the negative side, Dow (DOW) rained on the parade with a gloomy Q4 forecast this morning amid rising energy costs and weak demand. And initial weekly jobless claims of 214,000 were below expectations and showed no cooling in the hot jobs market, though higher than expected continuing claims could be a bright spot.

Also, the Cboe Volatility Index®(VIX) remains above 30, so there’s still caution out there. The light at the end of the tunnel can still turn into a freight train coming at you pretty quickly. Keep an eye on the British Pound (/6B) and the dollar as markets process the U.K. news.

Potential Market Movers

Tesla (TSLA) is under a microscope today, which could influence the tech sector. TSLA’s latest results announced after Wednesday’s close came in lighter than analysts had expected on the revenue side. Shares fell 4% ahead of the open.

Like other companies this reporting period, TSLA cited a negative foreign exchange impact on the quarter. It also referred to “ongoing supply chain-related challenges.” TSLA is still living and dying by the delivery sword, and that’s what people are focused on.

Shares of TSLA are down more than 40% so far this year, and today’s weakness appears to be hurting the entire Nasdaq-100® (NDX) in the early going.

AAL kept the ball rolling for airlines by beating Wall Street’s expectations as that industry continues to impress thanks to strong travel demand.

Through Wednesday, earnings have generally been better than expected, perhaps boosting sentiment a bit. About 9% of SPX companies have reported, and 70% have shown positive surprises.

Semiconductor stocks, which have been under scrutiny lately after the Biden administration recently announced new limitations on exporting technology to China, caught a tailwind and rose Wednesday. This came after strong earnings from ASML (NASDAQ:ASML) and after several companies in the sector shrugged off the new export restrictions’ potential impact on their business. That wasn’t the case with Lam Research (NASDAQ:LRCX), however, which reiterated negativity in the semiconductor space by saying the export curbs will have a big impact on sales.

As a reminder, not all semiconductor companies are equally affected by the restrictions, which mostly concern very sophisticated technology that could be used in military applications. Also, the semiconductor tool firms, which build the equipment used to build chips, may not see a huge immediate impact if China already has their equipment on hand. Applied Materials (NASDAQ:AMAT) recently sliced its Q4 sales projections as a result of the new rules.

Reviewing the Market Minutes

The S&P 500® index (SPX), fell 24.82 points yesterday, or 0.67%, to close at 3,695.16. The Dow Jones Industrial Average® ($DJI) fell 99.99, or 0.33%, to 30,423.81. The Nasdaq-100® (NDX) lost 0.44%, while the Russell 2000® (RUT) had the worst day of the bunch, falling 1.7%.

One source of pressure on the RUT Wednesday was real estate, which has a higher weighting in the RUT than it does in the SPX and delivered the worst daily performance of any SPX sector. A poorer-than-expected 8.1% September decline in housing starts announced Wednesday appeared to hurt some real estate stocks, and homebuilders were also victimized.

Toll Brothers (TOLL) fell 5%, and KB Home (KBH) slipped more than 4%. Building permits climbed month over month, but significantly, single-family home permits declined. Permits often give investors a good sense of where the housing market is headed.

CHART OF THE DAY: ONE STEP BACK. The small-cap Russell 2000 Index (RUT—candlestick) has shown signs of carving a bottom on the charts lately. However, it’s been kind of a two steps forward, one step back situation, and Wednesday was a step back day. Weakness in the real estate sector ($IXRE—purple line) might have hurt the RUT Wednesday, because it’s the sixth-largest component of the index on a weighted basis. Data Source: FTSE Russell. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Bent But Not Broken: It’s now been more than a month since the last “three-peat” for the benchmark SPX, which dropped back below 3,700 by the end of the day Wednesday. Every S&P sector other than energy declined.

The “not broken” part is a technical reference. The SPX dropped to an intraday low of 3,667 on Wednesday, just a tick above the June low of 3,666 and also below a band of support in the 3,670 area on the charts. But it then bounced pretty convincingly off that low and continued to draw buying interest through the rest of the session each time it fell below roughly 3,690.

This could tell you there’s some resilience in the market despite the fact that the overall technical trend remains lower on the SPX. Consider keeping a close eye on that area near 3,670 over the coming days to see if it holds. A break below that could mean the market is ready to again test recent lows below 3,600. Generally, S&P 500 futures have been trading in a narrow range between 3,600 and 3,800 over the last month.

Green Apple? When the SPX hit a nearly two-year low one day last week, dozens of large stocks sank to their weakest levels in a year. But shares of Apple (AAPL), while down significantly from recent peaks, weren’t in the “52-week club.” AAPL hasn’t established a fresh 52-week low since June’s $130-per-share price. While no stock investment is ever truly “safe,” some investors appear to group AAPL with the U.S. dollar and other assets they flee to in tough times. As one analyst told Barron’s recently, “defensive” stocks have traditionally included categories like utilities and staples. It could be argued now, the analyst said, that cell phones—like food and electricity—are some of society’s “staple” products that can’t be lived without in times good or bad. AAPL is expected to report next week, and that’s where the “defensive” thesis faces a test. Any major decline in iPhone sales or other unexpected hiccups might have investors rethinking AAPL as a “safety” play.

Buyback Boom Builds: Congress recently imposed a 1% excise tax on share buybacks that begins in 2023. The idea was to encourage companies to make new investments rather than return cash to investors. Time will tell if buybacks fall due to the tax, but Lockheed Martin (LMT) announced this week it’s increasing its share buyback plan by $14 billion. Total share buybacks declined nearly 22% in Q2, according to S&P Global, after setting a record in Q1. S&P Global forecasted that buybacks might pick up in Q3 and Q4 as companies try to accelerate 2023 buybacks into 2022 to avoid the tax. Infotech companies led buybacks recently, so keep an eye on their buyback plans as they report earnings in coming weeks. If that particular strategy loses popularity, it could remove a potential source of support for their shares. By the way, AAPL was the “poster child” for buybacks in Q2, S&P Global said in a press release, so AAPL’s current and future buyback plans might be worth watching when it reports next week. It could be a trendsetter one way or the other. One other thing: The energy sector received a specific warning from President Biden on Wednesday. “My message to the American energy companies is this: You should not be using your profits to buy back stock or for dividends. Not now. Not while a war is raging,” Biden said. “You should be using these record-breaking profits to increase production and refining.”

Notable Calendar Items

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, Personal Consumption Expenditure (PCE) prices, October Consumer Sentiment, and earnings from AbbVie (ABBV), Aon (AON), Chevron (CVX), and ExxonMobil (XOM)

Oct. 31: Happy Halloween! October Chicago PMI and earnings from CNA Financial (CNA), Goodyear Tire (GT), and Stryker (SYK)

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

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AALAmerican Airlines Group Inc

$16.530.06%

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AMATApplied Materials Inc

$593.003.94%

ASMLASML Holding NV

$1783.490.84%

IBMInternational Business Machines Corp