Stocks rallied on Tuesday with oil prices and bond yields taking center stage as investors assessed ongoing tension in the Middle East. The S&P 500 gained 0.9%, the DJIA was up just 0.3%, while the Nasdaq rose 1.4%.
West Texas Intermediate (WTI) crude oil futures, the U.S. benchmark, dropped nearly 5% as traders watched Israel’s expected retaliation to Iran’s missile attacks and U.S. diplomatic efforts to prevent a broad regional conflict. Energy shares fell in concert with oil. Though the immediate focus is on the Middle East, the U.S. election is looming in the background, along with uncertainties about how tax policies and possible tariffs could impact earnings.
Tech stocks led the way higher Tuesday, with AI chip maker Nvidia up 2%. Meta Platforms, Tesla, Broadcom, and Palo Alto Networks were also higher on the day. Rising bond yields were also on traders’ minds with the U.S. 10-year Treasury yield reaching its highest level since the beginning of August. Recent labor data has ignited fears that the Fed may drag their feet in terms of the size and pace of rate cuts, leading to the spike in yields.
S&P 500
sources: Bloomberg, CNBC
Closing snapshot
source: MarketWatch
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“To achieve great things, two things are needed; a plan, and not quite enough time.” — Leonard Bernstein
They’re back
It’s hard to believe but earnings season is here already and though companies’ third-quarter number will be fine, “fine” may not be enough to satisfy market expectations.
Analysts expect Q3 earnings per share for S&P 500 companies, in aggregate, to rise 4.1% year-over-year, which would come on sales growth of 4.7%; realistic expectations given the slowdown in economic growth and inflation. While product costs haven’t risen much, other expenses such as employee compensation are still rising, which is preventing companies’ profit margins from moving higher.
The faster growing stocks are expected to be in the tech sector, with firms like Nvidia continuing to experience rising demand for AI chips. Also, there are high hopes for Microsoft in terms of monetizing the demand for its cloud offerings and Meta Platforms utilizing its AI investment to increase user engagement, increase advertising impressions and increase the rates it charges advertisers.
What is expected to weigh on the S&P 500 index’s earning growth are the cyclical sectors that typically have sales that fluctuate with the outlook for the economy. Financials, consumer discretionary and industrials are expected to see earning fall veris a year ago. The same outlook is expected for materials and energy, which (recent mostly Q4 events notwithstanding) have seen the price of oil move lower for much of the third quarter.
sources: CNBC, Bloomberg, WSJ, Barrons, FactSet
Buying the top?
Given that Caterpillar (CAT) shares are already up 28% on the year, thus outperforming the broad-based S&P 500 index, it seems like a strange time to jump on the “buy” bandwagon. But a recent Barrons’ article argues that the shares are poised to build on previous gains. Though the stock has benefited from optimism about Fed rate cuts and a policymaker-led revitalization of the Chinese economy, Barrons contends that the real “tailwind” for Caterpillar is a rebound in the mining sector. Furthermore, even though CAT recently is trading near its highs, its multiple, at 17 times 12-month forward earnings is in line with its five year average; point being that the share price isn’t reflective of improvement the company has made in terms of efficiency and productivity. Time will tell.
source: Barrons
China’s stock market takes a breather
Chinese stocks started off on a high note on Tuesday, with the benchmark CSI 300 Index up 11%. By the end of the day,the index finished up only 5.9%. Meanwhile, in Hong Kong, an index of Chinese stocks dropped more than 10%, on pace to erase virtually all the gains made while mainland markets were shut for the Golden Week holiday.
The higher opening was based on reports of record account openings at China’s top brokerage houses and hopes that the press briefing by top economic planning officials would offer more fuel to the rally. However, the meeting seemed to underwhelm investors as it became clear that while Beijing is eager to revive the country’s stock market, it’s unwilling to do so with reckless abandon.
source: Bloomberg, CNBC, WSJ
Movers
Tesla (TSLA) – a Tesla veteran is overhauling GM’s struggling EV battery strategy.
Gold prices traded in a range of $2,638.00 to $2,672.40.
Bitcoin (BTC) traded higher by 0.58% to $63,126.50.
PepsiCo (PEP) became one of the first major companies to report third quarter results Tuesday. Though the company beat analysts’ earnings per share estimate, it missed consensus for revenue. Revenue fell 0.6% year over year, and the company cited “subdued category performance trends in North America,” product recalls, and geopolitical tensions. Shares were off 1% in early trading.
Crude Oil ~4.67% to $73.54 per barrel as the hurricane missed Gulf oil producing regions and China’s stimulus announcement disappointed investors.
sources: IBD, WSJ, Barrons, Schwab, CNBC
Chart of the day
Wells Fargo (WFC)
Wells Fargo stock has lagged its banking sector peers for years as it was constrained by a regulator imposed asset cap. Six years ago, regulators punished Wells for creating fake customer accounts by capping its assets at about $1.95 trillion. That limit, along with other regulatory issues, damaged its reputation, limited its growth and inflated its costs, while its peers operated more freely. Since the cap was put in place, WFC stock is down 12%, while JPMorgan is up 85%. According to a Bloomberg report, it is possible the cap on Wells Fargo could be lifted in 2025 after the bank submitted a third-party analysis of risk and control processes to the Federal Reserve.
WFC shares have been trading in a $50 – $59 range, and spending a lot of time around $57.28. Technically, there is support at $54.31, $51.21 and way below at $42.96. Upside resistance is at the top of the range,$59, then $60.78 and then $62.57.
sources: ThinkOrSwim, CNBC, WSJ, Barrons
In other news:
Thursday – September Consumer Price Index (CPI) report, expected 2.3% y-o-y with core expected unch at +3.2% y-o-y. On a monthly basis, consensus is 0.1% headline inflation growth for September, a tick lower than the 0.2% in August and July.
Friday – September Producer Price Index (PPI) report.
Wednesday afternoon’s release of minutes from the last (FOMC) meeting could generate more attention than usual because they’ll indicate the exact course of discussion that preceded the Fed’s 50-basis point rate cut.
sources: WSJ, CNBC, Bloomberg, Forbes, IBD, Reuters, Schwab Center for Financial Research
The stinger
Disclaimer
This letter is not offering investment, trading, or investment advice nor is based on any individual portfolio or business operation. We are are not a registered investment, stock nor commodity advisor. One should consult with their own registered advisor to discuss investment strategies that are appropriate for their business or personal goals, risk tolerance and financial situation. Information in this report and on any website is derived from a variety of source believed to be reliable however no representation is made that the information is accurate, complete or correct. These lessons, newsletter and site content is not intended nor shall not constitute or be construed as an offer or recommendation to “buy”, “sell”, “trade” or invest in any securities, commodities, futures, options or other asset referred to in said lessons, reports or newsletters. Rather, this research is intended to identify situations and circumstances that those in the trading community should be aware of to better help assess and improve their own risk management skills.
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