The bears had a relatively easy time last week as high yields, ongoing geopolitical risks, strong economic data, and, most importantly, disappointing earnings all worked in their favor.
“Healthy earnings season could have provided air cover for stocks to withstand the macro turmoil, but instead EPS reports compounded the market’s doubt and pain,” analysts at Vital Knowledge wrote in a report.
The S&P 500 sank 2.5% to hit fresh 5-month lows. The index is now testing below the key support near 4200 and the 100-WMA that sits around 4180.
Similarly, the Dow Jones Industrial Average lost 2.1% to close below the descending trend line that connects lower highs. The next support is the 200-WMA near 31800.
Finally, the Nasdaq Composite Index fell 2% as Amazon’s (NASDAQ:AMZN) rally on Friday helped the tech-heavy index to pare some losses from earlier in the week. The index previously touched the 100-WMA for the first time since May this year.
Looking forward to this week, the two key catalysts are the FOMC decision on Wednesday and Apple’s (NASDAQ:AAPL) earnings report on Thursday after market close. Moreover, investors will look forward to the Bank of Japan’s decision on Tuesday, the Eurozone CPI for October, and the Bank of England event on Thursday. The busy week will conclude with the U.S. jobs report for October on Friday.
For earnings, investors will be watching the following reports closely: Monday – McDonald’s (NYSE:MCD); Tuesday – Caterpillar (NYSE:CAT), Pfizer (NYSE:PFE), AMD (NASDAQ:AMD); Wednesday – CVS Health (NYSE:CVS), Qualcomm (NASDAQ:QCOM), PayPal (NASDAQ:PYPL); Thursday – Eli Lilly (NYSE:LLY), Starbucks (NASDAQ:SBUX), and Apple.
Earnings season in full swing
Around half of the S&P 500 companies reported so far, with 78% having reported a positive EPS surprise. Moreover, 28 S&P 500 companies have issued negative EPS guidance, while 14 companies have issued positive EPS guidance.
The blended (year-over-year) earnings growth rate for the S&P 500 is 2.7% in Q3 2023. If this rate holds, it will be the first quarter of YoY earnings growth reported by the index since Q3 2022, according to FactSet.
“In aggregate, the Q3 earnings season has been one of the worst in a while, not so much in terms of reported EPS vs. expectations but instead due to the totality of the reports,” analysts at Vital Knowledge added.
On September 30, the estimated YoY earnings decline for the S&P 500 for Q3 2023 was -0.3%. Nine sectors are reporting higher earnings today compared to September 30 due to positive EPS surprises and upward revisions to EPS estimates.
What analysts are saying
Vital Knowledge analysts: “Our view can be boiled down to “things are so bad, they’re good”. We’re taking the commentary from CEOs/CFOs over the government’s GDP report as a measure of the economy and as a result, yields have much more downside than upside risks (the data will eventually catch up to what companies are seeing on the ground). Meanwhile, sentiment has rarely been this bleak, prices are oversold, and selling pressure is exhausted – this makes for a favorable technical setup.”
Morgan Stanley’s analysts: “We think the S&P 500 price action into year-end is more likely to come down to where the average stock is trading rather than rallying to higher levels
because breadth typically leads price. Based on our fundamental and technical analysis, we remain comfortable with our long-standing 3,900 year-end target for the S&P 500, which implies a 17x multiple on our 2024 EPS forecast of approximately $230.”
Goldman Sachs’ analysts: “Although we expect headwinds to discount rates and balance sheets to persist, we would view a substantial further downgrade to the growth outlook as a buying opportunity.”
BTIG’s analysts: “We have been skeptical of the seasonal rally and even if November is positive, it likely won’t be a smooth/easy rally and could very well start from a lower level… Breaking below [4130] opens the door towards 3,950-4,000. Either way it’s likely to be a November to Remember.”
Oppenheimer’s analysts: “The breach of the S&P 500’s 200-day average indicates that the correction since July hasn’t run its course. We see 4,050 as next support and, to mark improvement, we’re watching for a key reversal day, or a rally back above 4,240. Most interesting about the correction is that risk has been dragged lower by safety. This is why we believe long-term opportunity is being presented.”
JPMorgan’s analysts: “Absent pre-emptive rate cuts by global central banks, we see risks compounding with peak effect of restrictive monetary policy still ahead… Real rates suggest equity market is overvalued.”
https://www.investing.com/news/stock-market-news/dow-jones-nasdaq-sp-500-weekly-preview-fed-apple-and-nfp-in-spotlight-3213583
