Major tech companies Microsoft and Alphabet are set to report earnings after the closing bell today, with investors looking to big tech results to provide a boost to stocks after the longest slide for the market so far in 2023.
The S&P 500 traded off session highs Tuesday, but remained in positive territory, led by losses in energy shares as oil dropped below $84 per barrel. The broad market index found support above the key 4,200 level once again, suggesting bullish sentiment. Verizon Communications, 3M Co. and General Electric climbed on positive forecasts, while Meta Platforms sank after lawsuits were filed over youth marketing claims.
Treasury yields edged lower following Monday’s volatility. The 10-year yield dipped slightly after a rocky session, reacting to mixed economic data.
Earnings Season Offers Tech Leaders Chance to Shine
With the earnings season now underway, investors hoping for good news are pinning their hopes on big tech to deliver. The five largest S&P 500 companies — Apple, Microsoft, Alphabet, Amazon and Nvidia — make up about 25% of the index’s total market capitalization.
Analyst estimates show these tech giants are projected to post 34% earnings growth on average compared to a year ago, presenting an opportunity to impress.
“As these big tech stocks go, so does the overall market,” said David Trainer, New Constructs CEO. “Strong big tech earnings may just be what’s needed to end the stock market correction that started in late July. If they blow away expectations and provide strong guidance, we could see the market rally strongly into year-end.”
Valuations Remain Stretched Despite Rising Rates
While higher interest rates have made extended tech valuations appear overly expensive, the group remains the most crowded trade among fund managers, Bank of America data shows.
This has led investors to buy protection against potential declines in Alphabet and Microsoft, two heavyweights responsible for the S&P 500’s gains this year. Shareholders are counting on robust earnings growth to justify 2022’s advance or at least maintain current price levels.
Growth Stock Pain May Ease According to Key Indicator
The battering of long-duration growth stocks, fueled by surging Treasury yields, could finally taper off based on the so-called Taylor Rule.
This monetary policy formula, created by economist John Taylor in 1993, shows how the Fed can utilize its benchmark rate to control inflation or spur economic growth. Now, it signals the central bank has normalized rates to an inflection point that could relieve pressure on stocks.
Vanguard Expects Rates to Stay High, Shallow Recession in 2024
Vanguard Group, which oversees $7.8 trillion globally, believes interest rates will stay elevated for longer and forecasts a moderate recession around mid-2024 with limited room for investment grade credit spreads to tighten.
“The US is still growing, but more policy tightening is likely needed for sustainable, high-quality growth until the labor market rebalances,” said Strategas’ Don Rissmiller. “The risk is that ongoing restrictive policy becomes too restrictive before that happens.”
China Steps Up Support as Japan Eyes Yield Moves
Chinese President Xi Jinping amplified support for the economy, the world’s second largest, through additional sovereign bond issuance, a higher budget deficit and even a rare central bank visit.
Bank of Japan officials are expected to watch bond yields closely before deciding whether to adjust yield curve controls at next week’s meeting.
ECB Lagarde Says Inflation Fight on Track, Fiscal Rules an Issue
European Central Bank President Christine Lagarde believes inflation efforts are working but lack of regional fiscal rules is becoming a problem.
Corporate News: Apple, GM, Barclays, Gucci, Spotify, Kimberly-Clark
- Apple will unveil new products October 30 in likely its final launch event of 2023.
- GM no longer forecasts potential $14 billion profit this year due to 6-week UAW strike impact.
- Barclays lost up to $2.7 billion in market value after tempering lending profit outlook.
- Gucci sales slowed as brand battles luxury downturn and internal upheaval.
- Spotify surged on Q3 beats, subscriber gains during price hikes.
- Kimberly-Clark lifted earnings outlook as shoppers keep buying essentials at higher prices.
- Raytheon’s profit topped estimates and announced a $10 billion buyback amid engine issues.
- Archer-Daniels-Midland scaled back fake meat expansion plans on lower demand outlook.
Key Events This Week
Investors will focus on several key events this busy week, including Wednesday’s interest rate decisions from the Bank of Canada and European Central Bank. Thursday brings the first look at Q3 US GDP along with high-profile earnings from Intel, Amazon and Apple.
Friday sees the latest PCE inflation data, consumer spending and sentiment reports. Ongoing geopolitical developments, COVID impacts in China and midterm election news will also remain on the radar.
Outlook Remains Uncertain, More Volatility Expected
Between lingering inflation pressures, rapidly rising rates, recession worries and geopolitical tensions, markets face Significant uncertainty. The path forward for stocks and the economy remains obscured.
Investors should prepare for continued volatility and unpredictable swings in the months ahead. A diversified portfolio that balances risk across asset classes provides the best way to navigate these choppy waters.
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