Mostly Solid Big Bank Results Fuel Relief Rally, But How Much Traction Does It Have?

(Tuesday Market Open) Can we enjoy consecutive daily gains? It hasn’t happened in two weeks, but the market is off to a good start this morning after yesterday’s fierce rally. One caveat: The last time the S&P 500® (SPX) rose two straight sessions, it immediately dropped six days in a row.

The strength yesterday and today likely reflects investors reacting to earnings from the big banks. As quarterly reporting season began, there were concerns about the overall macro environment and how it would impact earnings. When the banks had nothing overly troubling, especially in the loan loss category, the results shifted optimism to what’s coming ahead.

Banks earnings generally came in as expected or better, though many numbers looked weaker than a year ago (see more below). While we still have regional bank results ahead, Bank of America BAC put out some metrics on the health of their portfolios that pretty much showed the consumer being in a good spot.

That should be taken with a grain of salt, however. First, because the bulk of earnings lies ahead and we need to see how other sectors performed, and second because there’s nothing in the bank results that shows the consumer cooling off. This could mean the Fed responds by getting even more hawkish, and this is still a rally that could break bad at any given moment.

On a technical note, yesterday’s SPX close of 3,677 is just above support near 3,670 that rests around the June lows. Any sign of the SPX defending this area could be constructive.

Also constructive were earnings from Goldman Sachs GS, which became the final big bank to report and impressed investors with solid bond trading results. Shares rose around 3% ahead of the opening bell.  Earnings per share and revenue both surpassed analysts’ consensus views.

The Cboe Volatility Index®(VIX) fell below 31 but still hasn’t been under 30 in nearly two weeks. Anything above 30 is considered quite high and indicative of possible choppiness ahead. Speaking of choppy, the 10-year Treasury yield (TNX) continues to flirt with 4%, trading just below that ahead of Wall Street’s open, while the closely watched U.K. 10-year yield ticked a bit higher to nearly 3.98%.

Potential Market Movers

The earnings calendar gets busy today with results expected from GS, Johnson & Johnson JNJ, Lockheed Martin LMT, and Netflix NFLX.

Today 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.

Major data to watch for tomorrow morning is the September Housing Starts and Building Permits report. August’s data showed surprising strength in starts but weakness in permits, which could suggest the robust starts numbers can’t be sustained.

Analysts expect September housing starts to fall about 7% to a seasonally adjusted 1.465 million, according to consensus from Briefing.com. That would be a big slowdown from August’s 12% rise. Building Permits in September likely climbed about 2% to seasonally adjusted 1.55 million, according to the consensus estimate.

Housing Permits is a key leading indicator for the residential real estate market, so take a close look at that one. If permits (and starts) beat expectations, it may represent another “good news is bad news” scenario for the market, because rising shelter prices have played a major role in pushing up inflation.

The Case of the Missing Data

File this under the “no news is bad news” category: China’s decision yesterday to push back its gross domestic product (GDP) data release “indefinitely” doesn’t sound promising and could hang over the market. Economists had been looking for about 3% GDP growth in Q3, up from 0.4% in Q2, but still below China’s 5.5% growth estimate for the full year.

When a government like China’s decides not to release instrumental data during a party congress, it’s possible it’s trying not to rain on the parade, so to speak. That means the storm may come down the road for investors and companies. Especially companies in the consumer and info tech sectors with heavy exposure to China.

For now, investors in mega-caps and semiconductor chipmakers appear to be taking the delay in stride. Those areas of the market were among Monday’s leaders.

Earnings will play a big role in how this week turns out after four weeks in the last five saw the SPX fall. Some companies expected to report in coming days include AT&T (T), American Airlines (AAL), Philip Morris (PM), Union Pacific (UNP), Abbott Labs (ABT), Tesla (TSLA), Procter & Gamble (PG), Verizon (VZ), and American Express (AXP).

Reviewing the Market Minutes

Yesterday’s rally appeared to be sparked by falling U.K. interest rates, a rise in the British pound (/6B), a drop in the U.S. Dollar Index ($DXY), and strength in mega-caps, which have an outsized impact on stock index performance due to their huge market capitalizations. Microsoft (MSFT) and Alphabet (GOOGL) rose nearly 4% yesterday. Amazon (AMZN) climbed more than 6%. The tech sector fell double-digits over the last month, and some investors appear to think low prices may be a buying opportunity. We’ll have to wait and see if they’re right.

On Monday, the SPX rose 2.65% to 3,677.95. The Dow Jones Industrial Average® ($DJI) gained 550.99 points, or 1.86%, to close at 30,185.82.

The Nasdaq-100® (NDX) rose 3.46% to 11,062.53, while the Russell 2000® (RUT) climbed 3.17% to 1,735,75. It was the best day for the NDX since July.

The 2-year Treasury note yield, which is very sensitive to Fed rate policy, finished lower, narrowing the inverted yield curve a bit to around 44 basis points versus the 10-year yield. That’s still huge, historically, but a bit lower than earlier this month. An inverted yield curve is often seen as a recessionary signal. 

CHART OF THE DAY: TESTING RESISTANCE. Nasdaq ($COMP—candlesticks) broke support the first week of October but the bulls have begun to push back. On Monday, Nasdaq tested its old support level as resistance once more. If the bulls can gather momentum, they could regain this old battle line. According to the Stock Trader’s Almanac, stocks usually find a bottom in October and rally through the end of the year. But 2022 has been an unusual year. Data Source: Nasdaq. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Three Things to Watch

Trains, Planes, and…: It’s a big week for companies that keep us and the things we need moving. United Airlines (UAL), American Airlines (AAL), Tesla (TSLA), Union Pacific (UNP), and CSX (CSX) are all expected to report earnings in the coming days. The Dow Jones Transportation Average ($DJT) is down more than 21% year to date, which is a slightly better performance than the SPX, seems to be leveling out a bit over the last week or two, and is not far off recent two-year lows.

The transports are often considered a leading indicator. For example, if the Dow industrials are rising but the transports are declining, that may signal an economic slowdown. And if transports are starting to rise even as major indexes continue scraping two-year lows, it might mean better times ahead, though we should stress the word “might.” Railroads are among the subsectors getting a nice bump over the last few days, which isn’t long enough to be a trend but could hint at improvement in the supply chain situation. Airlines also have been climbing into earnings season, as we noted yesterday. The automobile and auto parts subsector, however, remains stuck in the mud. This may actually be a positive sign for the overall economy because higher prices in the auto market have been a major inflation driver.

2023 Estimates Threatened: Fed watchers are focused on the looming November 1-2 FOMC meeting, with chances now nearly 100% for another 75-basis-point rate hike, according to the CME FedWatch Tool. But chances of more hikes after that are also firming, which could start to weigh on earnings and economic growth estimates for 2023. The FedWatch Tool also now pegs the chance of consecutive November and December 75-basis-point rate hikes at nearly 70%. That means the Fed’s benchmark rate would finish the year between 4.5% and 4.75% compared to 3% to 3.25% now.

That range would be meaningful because the median Fed “dot-plot” projection last month was for rates to peak at around 4.6% sometime next year. If they hit that level before the end of 2022, it raises questions about whether the Fed might have to aim even higher to push inflation back toward its 2% goal. Looking ahead to the middle of next year, the FedWatch Tool indicates a nearly 40% chance of the Fed’s benchmark climbing to 5% or higher. If these projections stay high, watch for possible rollbacks in Wall Street’s 2023 earnings and economic growth estimates.

Bank Earnings in the Rear-View Mirror: You saw yesterday’s headlines about “strong” bank earnings. Well, it depends how you define the word “strong.” Yes, most of the biggest banks beat Wall Street’s consensus estimates for Q3. However, many saw earnings per share and revenue fall steeply from a year ago, and most added to their loan reserves to protect against possible defaults. Investment banking results suffered. GS, whose shares got a boost today from earnings results, saw year-over-year profit fall 43%. Also, improved year-over-year revenue for many of the banks reflected higher net-interest income, which has been fueled by the Fed’s interest rate hikes.

Be wary of big upward moves following the first few days of earnings season. The same thing happened in Q2 after banks reported, and the rally didn’t last. That doesn’t mean you shouldn’t consider buying quality stocks now. Last quarter’s market performance isn’t necessarily going to be repeated. It just means investors should be cautious about going “all in” and thinking we’re out of the woods. Remember that about 90% of this earnings season lies ahead.

Notable Calendar Items

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)

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)

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

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