October Blues: Interest Rate Concerns Keep Stocks Under Pressure From Ahead Of Big Tech Earnings

(Monday market open)

Wall Street’s red October is poised to get redder as concern over elevated interest rates and geopolitical tensions continue to burden the stock market.

Futures based on the S&P 500® Index (SPX) and the Nasdaq Composite (COMP) were down about 0.4% near the close of overnight trading after touching the lowest levels since early June. The 10-year Treasury yield (TNX) pushed back above 5.0%, the highest levels since 2007, signaling that high rates and Federal Reserve policy will continue to be a market fixation even with a heavy slate of earnings ahead this week, including several big tech companies.

Risk-off trading predominated last week, resulting in a four-session losing streak for the S&P 500 and Nasdaq that could stretch to five. The broader market is trading at nearly five-month lows, and October is on pace to be the third losing month in a row for the S&P 500 Index, a streak that hasn’t happened since early 2020.

We’re still in the thick of earnings season, and 70% of the S&P 500 companies that reported last week beat analysts’ expectations. That’s below average but still reflects strength.

“Earnings started fairly strong with financials but weakened over the course of last week,” says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

This week features 158 S&P 500 earnings reports, making it one of the busiest of the season. Fasten your seatbelts.

Morning rush

• The 10-year Treasury note yield (TNX) rose about 6 basis points to 4.98% after earlier topping 5.01%
• The U.S. Dollar Index ($DXY) was little changed at 106.10.
• Cboe Volatility Index® (VIX) futures were up 0.33 at 21.32.
• WTI Crude Oil (/CL) futures were down 34 cents at $87.74 a barrel.

What to watch

The week ahead: The final full week of October features a host of potentially market-moving data, including the government’s first estimate of Q3 Gross Domestic Product (GDP) and Personal Consumption Expenditure (PCE) prices, the Fed’s favorite inflation monitor. GDP is due out Thursday and PCE, along with Personal Income and Personal Spending, will be released Friday.

GDP growth for Q3 could be as high as 4.5% to 5.0%, thanks to strong consumption during the period. Strong data reports could drive Treasury yields even higher.

“If the reports show consumer spending is still resilient, expectations for another Fed rate hike could revive and 10-year yields could push back up to 5%,” says Kathy Jones, chief fixed income strategist at Schwab.

Before the Federal Reserve’s November 1 rate decision, three other central banks meet: the European Central Bank (ECB) and Bank of Canada this week,and the Bank of Japan (BoJ) next week just before the Fed. “All are expected to be on hold, with inflation easing in all three countries,” says Michelle Gibley, director of international research at Schwab. “The global rise in yields is helping to tighten financial conditions, although stronger relative economic data in the U.S. is contributing to the rise in the dollar.”

Stocks in spotlight

The month’s second big deal in the energy sector made headlines to start the week after Chevron Corp. CVX said it agreed to buy Hess Corp. HES for $53 billion in stock. Chevron’s announcement comes a couple weeks after Exxon Mobil XOM said it agreed to purchase Pioneer Natural Resources PXD for almost $60 billion.

Starting tomorrow, investors navigate a thicket of company reports. Technology takes the pole position with Microsoft MSFT and Alphabet GOOGL Tuesday afternoon. Meta Platforms META follows on Wednesday.

Advertising demand and cost savings could be in focus for Meta, shares of which have more than doubled this year. Amazon AMZN rounds out the week’s mega-cap reporting Thursday and could provide insight into cloud computing and preholiday retail demand.

Alphabet has posted two solid earnings reports in a row and tries to make it a three-peat tomorrow. Search, ads, and the cloud are the main business lines to watch, and all grew in Q2. Cloud revenue rose 28% that quarter, and it might be interesting to see if Alphabet can gain share on larger cloud competitors Amazon and Microsoft.

Microsoft shares dove after the company reported its previous quarterly results and treaded water since despite Microsoft closing its deal to buy Activision Blizzard. This will be the first earnings report for Microsoft since wrapping up the acquisition, so consider tracking any further details on integration. Microsoft’s Azure cloud platform is usually a closely watched metric, and so is the personal computing business that includes Word and other platforms. That area slowed in the last fiscal quarter, raising questions about its possible drag on overall performance.

The buck stops: As tech and communication services firms report this week, one metric that might get more attention than in recent quarters is foreign exchange. Greenback strength might be a weight on guidance as companies look ahead.

The strong dollar was a hindrance for the tech sector in 2022 but eased in early 2023 before the recent rally, which corresponded with 16-year highs in U.S. Treasury note yields. No sector has more international exposure than tech, which gathers about 60% of its revenue from overseas, according to research firm FactSet. A strong dollar makes U.S. tech products more expensive in other countries, often compressing demand.

Tech and communication services dominate earnings this week, but it’s busy for just about every sector. General Motors GM and Ford F both report as they deal with the impact of the autoworkers’ strike, and Exxon Mobil XOM and Chevron CVX represent energy, a sector that’s kept its head above water lately. Visa V is a key company to monitor for a view of consumer activity and credit conditions, while Coca-Cola KO and Boeing BA are two other massive companies which could have a market impact with their results.

Eye on the Fed

Early Monday, the probability that the Federal Open Market Committee (FOMC) will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was just 1.6%, according to the CME FedWatch Tool. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 24%.

Talking technicals: The SPX did something Friday it hadn’t done since March 17: It closed below the 200-day simple moving average (SMA). However, it wasn’t by much, just 9 points below the 200-day SMA, which is 4,233. The 4,200 level is the next technical support point to watch. It hasn’t closed below that since June 1, just before the summer rally took off.

Thinking cap

Ideas to mull as you trade or invest

Value proposition: One criticism often heard as major indexes rallied this spring and summer is that the advance mostly reflected multiple expansion. That means stock prices climbed despite falling earnings, which fundamentally raises valuations. But the S&P 500® Index’s (SPX) forward valuation is now below the five-year average, mostly due to Wall Street’s retreat from summer peaks. If a robust economy helped Q3 earnings grow more than the 0.4% analysts now expect, that would strengthen the denominator of the price-to-earnings (P/E) ratio, meaning stocks could rise without multiples necessarily accelerating. So far, Q3 S&P 500 earnings are growing more quickly than analysts had expected, but major indexes aren’t yet reflecting that as even companies that beat Wall Street’s earnings per share expectations have often been punished in the market so far this earnings season. The most recent case was American Express AXP on Friday.

Thanks but no...: If stocks rose as earnings fell earlier this year, it might stand to reason that improved earnings would send them even higher. However, as anyone watching the major indexes lately knows, that’s far from the case and likely reflects rising Treasury yields. The current SPX P/E ratio of 18 looks relatively low in a vacuum, but when the SPX competes with a 10-year Treasury yield at nearly 5%, many investors don’t see as much value in stocks. Historically, higher yields have correlated with lower stock market valuations, in part for that very reason. High borrowing costs can also hinder company growth, and with geopolitics heating up and the U.S. House lacking a speaker, the urge to take risk in stocks may be retreating further. For a measure of that, consider so-called “defensive sectors” like utilities and staples. Both have performed poorly in recent months despite all the U.S. and global tension. With dividends generally under 3%, these names that investors sometimes gravitate toward in tough times are struggling to compete with 5% yields.

Debt clock: As yields on government debt keep rising, that’s leading to questions about what it might take to halt the unrelenting rally. It’s not like no one is buying this debt, as there are signs of people pursuing yield through Treasuries. But the headwinds appear stronger than the tailwinds for now. “Higher for longer interest rates plus more resilient growth means yields have a higher floor for now,” says Kevin Gordon, senior investment strategist at Schwab. “Ultimately, the path of rates will likely be determined by monetary policy and the economy.”

Calendar

Oct. 24: Expected earnings from Archer Daniels (ADM), Coca-Cola (KO), 3M (MMM), General Electric (GE), General Motors (GM), Verizon (VZ), Microsoft (MSFT), Texas Instruments (TXN), and Visa (V).

Oct. 25: September New Home Sales and expected earnings from Boeing (BA) and IBM (IBM).

Oct. 26: Initial Weekly Jobless Claims, September Durable Orders, Q3 Gross Domestic Product, and expected earnings from Bunge (BG), Comcast (CMCSA), Honeywell (HON), Mastercard (MA), Merck (MRK), Southwest (LUV), Amazon (AMZN), and Ford (F).

Oct. 27: September Personal Income and Personal Spending, September Personal Consumption Expenditures (PCE) prices, Final October University of Michigan Consumer Sentiment, and expected earnings from AbbVie (ABBV), Exxon Mobil (XOM), and Chevron (CVX).

Oct. 30: Expected earnings from McDonald’s (MCD).

 

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