Weekly Market Update

While the Federal Reserve and inflation continue to loom large, the third quarter earnings season has been a nice change of pace for investors as about 20% of the S&P 500 has reported and thus far results have been better than feared. Bears have coalesced around the notion that earnings growth will be the next shoe to drop and as a result earnings expectations entering this season have fallen from 9.6% year-over-year EPS growth at the end of June to only about 1.5% today. Furthermore, while investors have repeatedly been punished for speculating on a Fed pause or pivot in interest rate hikes, there have been increasing indications, albeit subtle, from various Fed members that they are growing more cognizant of overtightening and potential spillover effects.

As a result, Friday saw the S&P 500 close 2.3% higher on the day and up over 4.7% on the week. Friday’s strength was particularly welcome, as the last trading day of the week has been brutal all year, particularly recently with the last five Fridays seeing S&P 500 declines of -2.37%, -2.8%, -1.51%, -1.72%, and -0.72% (per FactSet). Therefore, even though the S&P 500 is only back to levels we saw two weeks ago, investors enter the weekend almost jumping for joy as green is not a color we are accustomed to seeing on Fridays.

Next week, earnings season really heats up with the mega caps such as Microsoft, Amazon, Apple, and Alphabet (formerly Google) all reporting. This week’s stock market gains were particularly impressive considering the move in interest rates, as the yield on the 10-year US Treasury went from 4% to 4.22% in just five days. Ideally interest rates stop rising and earnings continue to come in better than feared and stocks can build on this week’s strength. However, next week we do have some important macroeconomic data points with multiple housing reports, the first reading for Q3 GDP, manufacturing and service PMIs, and perhaps most importantly, the Fed’s stated preferred inflation gauge, personal consumption expenditures (PCE) on Friday. The GDP report will be particularly interesting as the last two quarters have been negative and this week’s existing home sales report indicated a whopping 24% year-over-year decline.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder