D. Marie Market Snapshot: Earnings hold the key to the stock market’s fate
With corporate earnings shifting into high gear, how the stock market moves next week could determine whether key indexes correct lower or recharge to break out on the upside.
“Even though stocks have bounced back [Friday], overall the major U.S. indices have been trending sideways to lower. Next week could be a key week for trend setting as the focus shifts away from the Fed and economic data over to corporate news,” said Colin Cieszynski, chief market strategist at CMC Markets.
From a technical viewpoint, the fact that the S&P 500 successfully rebounded after breaching the closely-watched 2,115-level on Thursday is a positive sign, according to strategists.
“We remain a few bad earnings reports away from re-testing that zone again.But the first step for the market to regain its footing was [and] is seeing the bleeding stop,” Frank Cappelleri, executive director at Instinet LLC., said in a note
The next few days will provide a better idea of whether investors view any selloff as an entry point or a signal to retreat.
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“Upside follow through from here would mean the market is simply behaving as it has over the last few months. A quick roll-over and shattering of 2,115 would suggest the character has indeed changed,” he said.
As Cappelleri illustrates in the following chart, the stock market has traded higher after touching short-term lows throughout this year.
Frank Cappelleri
With nearly 100 S&P 500 companies—including 11 Dow components—slated to announce their quarterly financial performance in the coming week, the market will undoubtedly experience some turbulence, lending further credence to October’s reputation as a volatile month.
On the whole, investors should brace for more underwhelming results with FactSet projecting third-quarter earnings to decline 1.8%, extending the earnings slide into a sixth quarter.
However, some of the negative impact may be offset by subdued expectations and optimism that the worst of the earnings decline may be over.
“We have been in an earnings recession for the last 5 quarters but the market has been hanging in there because we hit the earnings growth trough in the first quarter and the outlook has been getting better,” said Karyn Cavanaugh, market strategist at Voya Investment Management.
Bob Pavlik, chief market strategist at Boston Private Wealth, is also generally upbeat on corporate results and expects the market to track higher if buying interest emerges as the S&P 500 tests support at 2,120 and 2,100.
“I’m expecting a decent earnings season and with good economic numbers, I think the market does trade higher,” said the strategist who believes the index has the potential to reclaim its 50-day moving average of 2,164.
Analysts are projecting earnings to steadily recover and grow 5.6% and revenue to rise 5.3% in the fourth quarter, according to John Butters, senior earnings analyst at FactSet.
Aside from corporate results, investors will also be monitoring economic data for clues on whether the Federal Reserve will be justified in raising interests.
Industrial production and the consumer price index for September, the Beige Book, and weekly jobless claims are among the key indicators in focus during the week.
“Attention may heat up regarding the Fed with the Release of the Beige Book on Thursday but don’t look for much to change from the last Beige Book. I expect to hear that the economy is moving ahead albeit slowly and respondents are generally positive with some exceptions,” said Pavlik.
Meanwhile, Fed Chairwoman Janet Yellen said in a speech on Friday that it may make sense to run a “high pressure” economy with a tight labor market to reverse some of the negative effects of the Great Recession.
Although some viewed her comments as dovish, suggesting that the Fed is inclined to keep rate lower for longer, Quincy Krosby, market strategist at Prudential Financial, said a December hike is still on the table as the speech was “purely economic theorizing and thinking aloud.”
The greenback’s recent strength is also a source of concern for investors as a stronger currency makes U.S. products less competitive against peers.
The greenback remains at levels that corporations have previously said were a burden to their top lines, said John Kicklighter, chief currency strategist at DailyFX.com.
“However, the scale of its impact may be exaggerated in so much that it is used as cover for more endemic issues,” he said. These problems include low rates, low market volatility and regulatory hurdles for the financial industry and soft consumer confidence as well as restrained spending for the discretionary sector.
The ICE U.S. Dollar index DXY, +0.55% a measure of the dollar’s strength against a basket of six rivals, is up nearly 3% over the past month.
Politics will continue to influence market sentiment with Democratic nominee Hillary Clinton and her Republican rival Donald Trump scheduled to face off for their final debate on Tuesday in Las Vegas, Nevada.
Biotech stocks could take a hit if Clinton reiterates her tough stance on drug companies over pricing while the Mexican peso USDMXN, +0.4428% —a proxy for Trump’s political fortunes—could sink or soar depending on how Trump fares during the debate.
The Dow Jones Industrial Average DJIA, +0.22% rose 39.44 points, or 0.2% to close at 18,138.38, for a weekly loss of 0.6%. The S&P 500 SPX, +0.02% gained 0.43 points to end at 2,132.98, for decline of 1% decline for the week while the Nasdaq Composite COMP, +0.02% edged up 0.83 points to 5,214.16, for a weekly decline of 1.5%.
Published at Sat, 15 Oct 2016 16:03:25 +0000
