Interest Rates And Apple Earnings

Key Takeaways

• Earnings Season Has Not Been Kind
• Fed Expected To Leave Rates Unchanged This Week
• October Employment Report Caps A Data Heavy Week

Markets were mixed on Friday with the S&P 500 dropping 0.5% while the Nasdaq Composite managed to move higher by 0.4%. The split results capped a turbulent week that saw across the board losses. Both the Nasdaq and S&P 500 lost 2.6% and 2.5%, respectively. However, despite losses on the week, stocks remain up for the year with the S&P up 7% and Nasdaq up 21%.

It’s a heavy week of data both from a macro and micro perspective. Approximately 30% of the S&P 500 companies are scheduled to report earnings this week, with the headline acts consisting of AMD, Apple
AAPL
, Starbucks
SBUX
and Qualcomm
QCOM
. We’re also going to get the latest reports on job openings, a decision on interest rates from the Federal Reserve Open Market Committee (FOMC) and the October employment report. In other words, there’s a little bit for everyone. Add in the geopolitical situations and a looming government shutdown and you’ve got the recipe for a potentially volatile week.

I want to point out a couple interesting facts about this quarter’s earnings. It’s been a tough quarter so far, regardless of whether a company beat estimates or not. For stocks in the S&P 500 that have missed on earnings, it’s been particularly tough. According to FactSet, those stocks have fallen 5.5% on average, compared with a 5 year average of just 2.3%. Put differently, companies that miss on earnings are being punished roughly twice as much as they have recent history. Companies reporting upside surprises have also had a rough go of it. Those companies have seen their shares fall by 1% in the two day period leading up to their earnings report and two days after.

The punishing nature of this earnings cycle comes despite estimates that profits for the S&P 500 will increase 2.7%, according to FactSet. What this tells me is the mood surrounding the market has decidedly shifted from earlier this year. The optimism which drove stocks to significant gains appears to have been replaced by caution and skepticism. Part of the reason for the skepticism is the result of persistent inflation.

Last week’s report on Personal Consumption Expenditures (PCE) showed prices increasing 3.7% on a year-over-year basis. That number was in line with expectations and likely solidified the Fed’s decision to stand pat when they meet this week. According to the CME, there is a 98% probability rates will be left unchanged at the November meeting and a 74% chance they will remain unchanged at this year’s final meeting in December. Still, that 3% remains above the Fed’s 2% target.

Aside from earnings, the Fed and economic reports, a few other things I’m keeping an eye on are bonds, oil and gold. Yields on the benchmark ten year note briefly touched 5% last week before pulling back. 5% is a psychologically important threshold for traders so I’ll be keeping an eye on that. Oil is down nearly 2% in premarket to just under $84. In the last month, oil has traded in a range of $80 – $92 per barrel. Finally, gold is back above $2000. Gold is up 10% this year in conjunction with fears surrounding inflation.

If asked to guess a day that’s going to be more quiet this week, today would get my vote. After today, the cadence of earnings releases and economic reports will accelerate. There will be an abundance of potential pockets of turbulence and that can mean volatile trading. That is why I frequently talk about trading small, so when those choppy markets do come around, they aren’t quite as difficult to deal with. As always, I would stick with your investing strategy and long term plans.

tastytrade, Inc. commentary for educational purposes only. This content is not, nor is intended to be, trading or investment advice or a recommendation that any investment product or strategy is suitable for any person.