Will Better than Feared Q3 Earnings Season Change the Negative Tone?

Performance for Week Ending 10.21.2022

The Dow Jones Industrial Average (Dow) finished up 4.89%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) gained 4.59%, the Standard & Poor’s 500 Index (S&P 500) added 4.74% and the Nasdaq Composite Index (NASDAQ) tacked on 5.22%. Sector breadth was positive all 11 of the S&P sector groups closing higher. The Energy sector (+8.08%) was the best performer followed by Technology (+6.49%) and Materials (+6.15%).

*See below for Index Definitions

Market Observations: 10/17/22 - 10/21/22

Stocks indices finished the week higher with the S&P 500 posting its biggest weekly gain since late-June. The better than feared kickoff to the third quarter earnings season coupled with signs the Federal Reserve (Fed) may ease off its aggressive rate hike campaign were the primary drivers of the gains. According to Wall Street Journal reporter Nick Timiraos in an article published late in the week, the Fed is likely to debate whether and how to signal plans to approve a smaller increase in December. Timiraos is often referred to as the “Fed Whisperer” and is a known “mouthpiece” for the Fed and as such, he is closely watched as his calls have been almost clairvoyant when predicting the central bank’s next move. According to the article, some Fed officials have begun signaling their desire both to slow down the pace of increases soon and to stop raising rates early next year to see how their moves this year are slowing the economy. They want to reduce the risk of causing an unnecessarily sharp slowdown. Others have said it is too soon for those discussions because high inflation is proving to be broader and more persistent.

Likely worrying the Fed, one only has to look at the current state of the housing market. Last week, the National Association of Realtors (NAR) reported that existing-home sales fell for an eighth straight month in September, the longest streak of declines in 15 years. Sales of previously owned homes declined 1.5% in September from the prior month to a seasonally adjusted annual rate of 4.71 million, the weakest rate since May 2020.  The surge in mortgage rates is the primary culprit for the weakness with mortgage giant Freddie Mac reporting that the average rate on a 30-year fixed mortgage inched up to 6.94%, a fresh 20-year high, and more than double the
3.09% rate from a year ago.
 
Q3 Earnings – Peak Week: Through Friday, 99 members of the S&P 500 have released third quarter results, with nearly 72% beating expectations. While it’s still early in the process, aggregate earnings for this group are down 1.8% and below the 2.45% forecasted pace of growth for the overall quarter. So far, the strongest results have come from Industrials, Consumer Discretionary, and Energy. At this stage the Materials sector has posted the weakest pace of growth. With 325 members of the S&P scheduled to release results over the next two weeks, we are likely to get a better sense of how the overall quarter shapes up.
 
The Week Ahead:  It will be a busy week on the earnings front with 159 members of the S&P 500 scheduled to release results, including 12 members of the Dow Industrial Average amongst this group.  On the data front, the first reading of Q3 Gross Domestic Product (GDP) for the US will be reported on Thursday and will be closely watched after the two negative readings during Q1 and Q2. According to the Atlanta Fed GDPNow model, growth is expected to rebound to 2.85%.  Other highlights of the data calendar include: the S&P Manufacturing PMI for October, the October reading of consumer confidence from the Conference Board, September New Home Sales, the core personal consumption expenditures (PCE) during September, and the inflation expectations data from the University of Michigan on Friday. The Fed speaking calendar will be almost nonexistent, reflecting the traditional blackout period ahead of the November Federal Open Market Committee (FOMC) meeting.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.