The Bulls Are Back: Why the Selloff Is Probably Over

Stocks jumped through noon after opening lower today on yield-driven fears. While the Dow Jones Industrial Average dipped slightly below neutral, the S&P 500 managed to muster a rise exceeding 0.2%, and the Nasdaq Composite climbed approximately 0.5%.

These fluctuations occur amidst a backdrop of persistent bond sell-offs and apprehensions regarding escalating tensions in the Middle East, all while the market anticipates a potentially pivotal earnings season kick-off from Big Tech.

This week is brimming with big earnings energy as Microsoft, Alphabet, Meta, and Amazon all prepare to release their quarterly figures. Other major players, including Coca-Cola and Exxon, are also on deck, contributing to a bustling week of corporate revelations.

Investors are setting their sights on Thursday’s unveiling of the initial third-quarter GDP estimate. Forecasts suggest an annualized growth rate of 4.3% for the US economy. Additionally, Friday is slated to offer another glimpse at the Federal Reserve’s favored inflation indicator, adding another layer of anticipation.

This influx of Big Tech reports couldn’t be more timely, considering the recent pressure on stocks stemming from Treasury yields touching 16-year highs and prevailing uncertainty surrounding the Fed’s interest rate trajectory. Just last week, the market felt the strain, with the Nasdaq falling over 3%, the S&P 500 dropping above 2%, and the Dow Jones Industrial Average receding over 1.6%.

As the Federal Reserve commences its blackout period in preparation for the upcoming meeting starting October 31, market speculation is rife. Current sentiment indicates a 96% probability against an interest rate hike during this assembly.

Federal Reserve Chair Jerome Powell, in his recent address to the Economic Club of New York, acknowledged the inflation rate as excessively high, potentially jeopardized by the economy’s steadfast resilience. This stance seemingly diminishes the likelihood of a rate hike in November, yet keeps the door ajar for subsequent meetings.

EY’s chief economist, Greg Daco, emphasized this perspective in a recent note, suggesting, “The recent string of positive economic surprises will keep the Federal Reserve on high inflation alert, and although it won’t tilt the Federal Open Market Committee toward another rate hike at the November meeting, the December meeting will very much remain a ‘live’ one.”

The forthcoming days promise a revealing look at economic growth and inflation, two metrics under the Fed’s close scrutiny. Expectations for Thursday’s GDP data indicate a potential peak in economic growth for 2023, following consistent robust data that has pushed recession speculations into 2024. Meanwhile, Friday’s data is anticipated to reveal a 3.7% annual increase in September’s “core” PCE, a slight decrease from August’s 3.9%.

Bank of America’s US economist, Michael Gapen, dissected the Fed’s recent remarks on these metrics, highlighting a critical crossroads: “Either growth will slow or inflation will start to move back up. If growth slows, the Fed might not need to hike again. But if inflation picks up, further hikes would be warranted.”

On the corporate front, the market’s trajectory may be significantly influenced by updates from four of the “Magnificent Seven” stocks. These key players have been instrumental in driving the 2023 stock market rally. Their performance could sway the major indexes, considering that without their contribution, the S&P 500 would be hovering just below 3,900, translating to a roughly 10% decline.

These reports are expected to provide insights into various sectors, including consumer spending, artificial intelligence advancements, and advertising trends. Particularly, revenue figures for cloud segments from Microsoft and Amazon will be under the microscope.

The narrative around AI is predicted to vary between companies. UBS analysts suggest that Meta, having previously enjoyed an AI-driven surge, might still have untapped potential based on the prospects of the technology.

UBS analyst Lloyd Walmsley expressed optimism about Meta, noting, “We like META, and despite elevated expectations into 4Q, we think the GenAI consumer app bull case is still under-appreciated and not priced into shares.” Conversely, his colleague, Karl Keirstead, anticipates a more subdued contribution from AI for Microsoft in the current quarter.

Amidst these corporate narratives, the broader stock market scenario has been less about earnings and more focused on the implications of soaring bond yields for the Fed’s policies. Since the Fed’s last meeting in late September, bond yields have skyrocketed, reaching 16-year highs. This surge has led some Fed officials to suggest that the financial tightening resulting from increased yields could effectively substitute for an additional Federal Reserve interest rate hike.

Powell, during his appearance at the Economic Club of New York, emphasized the need for a cautious approach, stating, “We have to let this play out and watch it. But for now, it’s clearly a tightening in financial conditions and so we’ll be watching it carefully.”

Investors are now eyeing key economic indicators due for release this week, which could illuminate the robustness of the US economy. These include critical readings on third-quarter GDP and the Fed’s primary inflation measure.

The market is also adjusting to the “new normal” of higher borrowing costs, a reality cemented by Jerome Powell’s affirmation of the central bank’s strategy. Currently, the 10-year yield has relaxed slightly, hovering around 4.87%, a modest retreat from its 16-year pinnacle. Similarly, the yield on the 30-year Treasury has receded to 5.01%.

In this climate of heightened vigilance, the market is on tenterhooks, awaiting data that could either validate or challenge the strength of the US economy. The revelations of third-quarter GDP and the Fed’s preferred inflation metrics are among the most anticipated releases.

Adding to the market’s speculative nature, the “Fed blackout period” coincides with the end of the “buyback blackout,” potentially marking a significant shift in market sentiment. This period sees companies re-entering the fray post-earnings, with Goldman estimating that approximately 20% of the S&P 500 are now in their open window period, potentially rising to around 40% by week’s end.

All in all, the market seems poised for a big rebound so long as another yield spike doesn’t emerge, especially as stocks enter a seasonally strong stretch of trading.


Please enter your comment!
Please enter your name here