Michael Reinking:
Good morning. I'm Michael Reinking, senior market strategist at The New York Stock Exchange, and you are listening to the Market Storylines Podcast on the Inside the ICE House Podcast Feed. As we record on Thursday afternoon, let's get to this week's Market Storylines. Last week, US equity markets extended the recent gains with the S&P 500 closing higher for the sixth consecutive week and nine of the last 10.
Now, last Friday was options expiration, which we highlighted could mark a short-term turning point. While markets were modestly higher last week, it felt more like a consolidation as opposed to a blow-off move, though there were definitely signs of speculative behavior percolating beneath the surface. To start this week, markets have pulled back, albeit modestly within the context of the recent rally.
So let's talk about what is driving some of that. Earnings have taken center stage with over 20% of companies in the S&P 500 reporting this week. We have moved past the financial dominated period of the earnings season, and the results have not been as uniformly positive. By the numbers, over three-quarters of companies are beating earnings estimates, but the percentage of companies beating on sales has trailed off from recent quarters.
And that was something that was also evident in this morning's flash PMIs with the decline in new orders. Now, broadly, this week's results have been met with some selling, but the price action isn't always a reflection of the results. Broadly, the numbers continue to be solid, and I think much of this is about how much stocks have rallied coming into the reporting season. Elevated valuations and some big catalysts just around the corner.
Now, commentary on calls has remained cautious regarding the macro backdrop with global companies continuing to highlight some overseas weakness. However, in a couple of industries, management teams have suggested a trough is approaching. Earnings reports are driving some volatility, particularly at the sector level, but this week's pullback seems to be more related to the recent move in Treasury yields and the US dollar.
Treasury yields hit their recent low right around the time the Fed cut rates in the middle of September. The first part of that move higher seemed to be a nod by the market to the Fed's aggressive start to the easing cycle, helping to preserve hopes for a soft landing. But since then, there have been a confluence of events that has started to push yields higher.
First, there was a round of stimulus in China, and then US economic data came in better than expected, including the jobs report at the beginning of October, which accelerated the move to the upside. Market expectations for further outsize cuts began to seep out in the market. And with an improved global growth outlook, inflation expectations also moved higher.
After the initial thrust higher posted jobs report, yields began to consolidate for a couple of weeks, though the US dollar continued to march higher, as interest rate differentials began to widen with central banks outside of the US taking a more dovish stance. However, this week, yields began to move higher again, and it was happening in the void of economic data raising concerns as to what the driver is or might be.
Now, over the last year, I've made the case that a higher interest rate environment wasn't a death knell for markets as long as it was happening for the right reasons, namely in response to strong economic growth. One of the election risks that we've highlighted would be a wave where one party wins both the presidency and control of Congress, as this would remove checks and balances within the government at a time when the country is running a large fiscal deficit, an issue that neither candidate has really addressed at this point.
The fear is that this could bring back the bond vigilantes who have largely been dormant since the 1980s outside of a citing in 2022 in the UK. For those not familiar with the term bond vigilantes, it was coined by Ed Yardeni in the 1980s and refers to the idea that if a bond investor believes fiscal spending has become irresponsible, they can force policy change by selling and pushing yields higher.
As we highlighted last week and in our written work, the Ice Bank of America MOVE Index, a measure of Treasury volatility, and CDS markets have been moving higher recently reflecting some of these concerns. This will be a situation to monitor going forward. And even if there is a divided government, we'll need to go through another debt ceiling negotiation early next year, which is also in the back of investors' minds and can add to the volatility.
At this point, the pullback in equity markets has been modest and very orderly, and it's not surprising to see some volatility as we're less than two weeks away from the election. From a technical perspective, the S&P 500 is testing some key short-term support levels with the 20-day moving average just under 5800. If this level fails to hold into the end of the week, a bigger and more important support level is down around 2% at 5675, which coincides with the area we broke out from in mid-September and the rising 50-day moving average.
So with the market testing these key technical levels, next week has the potential to be a spooky week. We are in the peak of earnings season, and that will continue to be a focal point next week with about a third of companies in the S&P 500 reporting, including the bulk of the Mag 7, which alone make up about a third of the index's market capitalization. Unlike this week, there are a bunch of macro catalysts also on the horizon, including a Bank of Japan rate decision, which given the backdrop in currency markets will get some extra attention.
There is some key global economic dat. Next week. In the US, we'll see personal income and spending, PCE, the Fed's preferred gauge of inflation, our first look at Q3 GDP, and the all important BLS employment report on Friday, which as we've highlighted previously has the potential to be very noisy given the impacts of hurricanes and strikes. And of course, we'll be heading down the home stretch to election day.
Last but not least, I'll wrap up with the congratulations to the New York Liberty, who celebrated winning their first WNBA title with us on the floor of the exchange earlier this week. Next up, the New York Yankees. Bring it home. That's going to do it for this week. Have some fun trick or treating. Once again, thank you for spending some time with us today. Remember to tune in every Friday to the Market Storylines Podcast on the Inside the ICE House Podcast Feed, and remember to rate and review. Thank you for listening. I'm Michael Reinking. I'll talk to you again next week.
Disclosure:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified. Neither ICE nor his affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the information, and do not sponsor, approve, or endorse any of the content herein, all of which is presented solely for informational and educational purposes.
Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security, or a recommendation of any security or trading practice. Some portions of the preceding conversation may have been edited for the purpose of length or clarity.