Dow Jones, Nasdaq, S&P 500 weekly preview: More room for correction in October

The S&P 500 (SPX) recorded the fourth consecutive weekly drop candle after falling 0.7% last week. The index printed the lowest level since the end of May as stocks responded to another bond market selloff.

The Nasdaq Composite Index (IXIC) ended the week flat, despite also plunging below 13000 for the first time in 4 months. Finally, the Dow Jones Industrial Average (DJI) index fell as much as 1.3% after testing an important daily support in the context of the 100 daily moving average.

“We’re not surprised by the message that the policy rate may stay higher for longer. However, we’re also not convinced the Fed will have to do much more tightening at this stage. Instead, it’s time, not further rate hikes, that is needed to see inflation moderate back toward the target. In other words, it may be more bark than bite from here. In any event, that bark has sent rates higher and stocks lower, a reaction that we think may be creating an opportunity,” investment strategists at Edward Jones said.

Q4 is Here

Traders are entering the final quarter of 2023 with a focus on economic releases that could set the tone for the rest of the year. While they hope for positive data, the central bank narrative remains crucial, especially in the context of ongoing efforts to control inflation.

Treasury yields are playing a pivotal role in shaping market sentiment, and there is a wealth of U.S. economic data to analyze. Key reports such as the ISM index, ADP employment figures, U.S. Factory Orders, Non-Farm Payrolls, and hourly earnings will be closely scrutinized to validate the Federal Reserve’s hawkish stance.

Recent data has indicated a slowdown in U.S. consumption, and the surge in oil prices is expected to have an impact.

This week will also feature speeches by Federal Reserve officials across the spectrum, including Chairman Jerome Powell. With bond markets already factoring in tightening measures, these speeches will be closely watched. Any hints of a dovish tone could potentially reverse some of the recent bond market movements.

Ahead of the Q3 earnings season, FactSet earnings analysts noted that a record-high number (116) of S&P 500 companies have issued EPS guidance for the third quarter.

64% of companies in the S&P 500 have issued negative EPS guidance, which is higher than the 5-year average of 59% but in line with the 10-year average of 64%. When it comes to the number of companies providing negative EPS guidance, it exceeds the 5-year average of 58 and the 10-year average of 63.

In total, 116 S&P 500 companies have issued EPS guidance for the third quarter, which is above both the 5-year average of 97 and the 10-year average of 99.

What analysts are saying about U.S. stocks

Edward Jones: “We expect markets to endure bouts of anxiety ahead, prompted by temporary uncertainties, like a government shutdown, as well as more structural challenges, like high interest-rate headwinds to the economy and stock prices. That said, we think this emerging correction in the markets will present compelling opportunities, as we think the broader uptrend in equities remains intact.”

RBC: “Net bullishness on the AAII survey, which has fallen sharply since mid August, still isn’t back down to levels that would indicate investor pessimism had gotten too extreme.”

BofA: “Although 4Q returns are often solid for the SPX, October is known for big intra-month drawdowns. The breakdown below 4335-4325 is bearish entering October and suggests risk on the SPX to the 4200 area (rising 200-day MA, June breakout point and 50% retracement), which means that we favor an undercut of last week’s low at 4238. The next resistance is 4375-4402 (9/21 downside gap and rising 100-day MA). The next support is 4114 (61.8% retracement).”

Citi: “We advocate a barbell approach to buying the recent US equity drawdown. Consistent with our call to buy growth on pullbacks, Tech is lifted to OW. Our Q4 SIGN portfolio is incrementally more overweight Growth and less so for Cyclicals. Industrials stand out among Cyclicals.”

JPMorgan: “Despite some recent weakness, where SPX RSI turned technically oversold, we believe that the equity risk-reward remains challenging. Divergences between softer activity momentum and the elevated equity prices, as well as market internals, that opened up in the summer, are starting to close, but there is more to go.”

Morgan Stanley: “Equity investors should avoid rotating into early-cycle winners like consumer cyclicals, housing-related/interest-rate-sensitive sectors, and small caps. Instead, we believe a barbell of large-cap defensive growth/quality with late-cycle cyclical winners like Energy and Industrials should outperform.”