US stocks will be tested by Tesla, Netflix earnings and pending CPI report
Earnings reports next week, including from Tesla and Netflix, will provide a deeper look at US corporate profits while pending US inflation data will mark another test for the stock market, which is increasingly shaky although still hovering around record highs.
The S&P 500’s fourth year of gains kicked off this week with some significant changes after a long period of market calm.
Escalating US-China trade tensions and credit concerns at US regional banks are driving the concerns. CBOE’s market volatility index, known as Wall Street’s “fear gauge,” has surged in recent days and hit its highest level in nearly six months on Friday.
“The market is becoming more volatile, but it’s also entering a very volatile period where we don’t have a lot of risk catalysts emerging,” said Michael Reynolds, vice president of investment strategy at Glenmede.
“Once your valuations reach full levels, as we are seeing now almost across the board, you have to be on the lookout for additional risk catalysts.”
The trigger for this latest volatility was the surprising reemergence of US-China trade tensions. Stocks slumped last weekend after the US threatened to raise tariffs significantly on November 1 in connection with China’s export controls on rare earth metals.
U.S.-China trade issues will be key for markets in the coming week, said Doug Beath, global equity strategist at Wells Fargo Investment Institute. US President Donald Trump confirmed on Friday that he will meet with Chinese President Xi Jinping in two weeks in South Korea.
Sharp swings in global financial stocks at the end of the week also kept investors on edge as they weighed the magnitude of credit concerns emerging from regional US banks.
Major stock indexes posted weekly gains and headed for another strong year. The benchmark S&P 500 index is up 13.3% year-to-date and 1.3% below its record high. But there are signs the market is weakening.
The percentage of S&P 500 stocks in some form of uptrend declined from 77% in early July to 57% on Tuesday while the number of stocks in a downtrend increased from 23% to 44% over that time, according to Adam Turnquist, chief technical strategist for LPL Financial.
“The narrowing of the gap highlights the emergence of cracks in the foundations of the market,” Turnquist said in written comments. Likewise, Kevin Gordon, senior investment strategist at Charles Schwab, said he will be watching how widespread market gains are in the future.
“If you have fewer companies moving higher, but the index is moving higher because of megacaps, that’s a very important distinction,” Gordon said.
Attention will be on third-quarter earnings after major banks got off to a strong start to the reporting season. In addition to streaming giant Netflix and electric vehicle maker Tesla, other companies due to report in the coming week include consumer companies Procter & Gamble and Coca-Cola, aerospace and defense giant RTX, and technology stalwart IBM.
Corporate results and executive comments will provide insight into the economy as the US government shutdown has halted economic data releases since October 1, including monthly employment data.
“Company reports and what companies say are our best chance at assessing the health of the broader economy,” Gordon said.
The administration said it would release its U.S. consumer price index for September on Friday, nine days late, and said the CPI data would allow the Social Security Administration to meet its deadline for paying benefits on time.
The CPI report, which is a closely watched measure of inflation, will be released days before the Federal Reserve’s next monetary policy meeting on October 28-29. The US central bank is expected to cut interest rates again by a quarter of a percentage point, after weak jobs data prompted the Fed to cut interest rates last month for the first time this year.
“We really would have to see something unlikely happen in terms of inflationary pressures that would be important to get the Fed off the path of a rate cut at its October meeting,” Glenmede’s Reynolds said.
Source: Reuters
