The stock market is surviving a scary week. Why could this week be even scarier?
The stock market survived the debt ceiling struggle and oil price hike last week. Can you survive earnings season?
The week started with everything falling apart – energy prices were skyrocketing and the US appeared on the verge of default. ended with a drop in oil prices, Thanks to Vladimir PutinOf all the people and Debt ceiling postponed to December. It even shrugged off what appeared to be a surprisingly weak jobs report – pending – finishing higher.
gained 1.2% over the past week, while
rose 0.8%, and
Squeak progress 0.1%. For the Dow, this was only the second rally in the past six weeks.
But let’s admit something here for now. None of this is normal – not politics, and certainly not economic data. The September jobs report was disastrous – but not because of the disappointing headline figure. Yes, the US added only 194,000 jobs in September, well below expectations of 500,000, and this is the kind of error that could indicate a slowing economy. However, the number was close to meaningless, given the seasonal adjustments – which may have skewed it lower – and compared to the household survey, which showed more than 500,000 new jobs as the unemployment rate fell to 4.8%. Try to make an investment decision from it.
Investors should be careful Moderate their reactions to the non-farm payroll report, which is highly volatile and usually undergoes substantial revisions in the months following initial release,” wrote Jason Pride, chief private wealth investment officer at Glenmede.
However, the market tried to make the most of it. While bonds initially saw little buying, dragging yields down, 10-year Treasuries closed the week with a yield of 1.6%, the highest since June, defying what appeared to be bad news. The Dow Jones ended Friday 0.03% lower, while the S&P 500 was down 0.2% and the Nasdaq was down 0.5%.
The fact that the stock market will do almost nothing makes sense given the complexity of the employment picture. Employment opportunities remain high, but it appears that the number of people leaving the workforce is only increasing. Even a wage hike — average hourly wages rose 4.6% — hasn’t been able to bring workers back. This means that the job market though Unemployment rate Much higher than pre-pandemic levels of 3.5%, it may actually be more compact than it appears.
The fact that costs are rising, from labor and raw materials, is starting to worry investors. Only 25% of investors expect corporate profit margins to expand over the next six to 12 months, according to an RBC Capital Markets survey, down from 39% in June. About 36% now expect profit margins to shrink from 19%. Respondents have also become more pessimistic about the market – 28% now describe themselves as pessimistic, up from 14%.
The worst may not be over yet, writes Laurie Calvasina, head of US equity strategy at RBC Capital Markets. “Our survey results support our belief that the relaxation in institutional investor sentiment underway has not yet been fully implemented, which may contribute to further volatility in the broader US stock market in the near term,” she explains.
Investors will get an initial reading of these concerns when earnings season begins next week. Banks get all the attention, and for good reason. Reports from
NS. NS. Morgan Chase
(Stock ticker: JPM),
(c) It should help give the market a reading of the strength of the US economy, demand for loans, and even consumer spending. (Profits from the financial sector are expected to grow by 18%.) But other companies will give investors their own reading of costs and margins.
(FAST), a distributor of industrial stabilizers, is expected to post a profit of 42 cents per share on Monday, despite a rating downgrade of
Friday due to concerns about higher wages and shipping costs.
(DAL) should give a reading on wage pressures, as well as travel demand.
Just don’t expect the same kind of earnings season we’ve had since Covid. Since the shutdowns, US companies have, for the most part, reported massive earnings growth and big “hit”, but something has changed. Analysts stopped revising their earnings forecasts higher and lowered them instead. Earnings are still expected to rise more than 20% from the third quarter a year ago, although the growth rate has slowed. And with stock prices still rising – the S&P 500 is trading at 20.6 times forward earnings for 12 months – there’s little room for error. “There are a lot of adjustments that have to go on,” says Dave Donabedian, chief investment officer at CIBC Private Wealth US. “The market has more downside than the upside in the short term.”
The new normal? It may just be more volatility.
write to Ben Levison in Ben.Levisohn@barrons.com