The best way to measure investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go. – Benjamin Graham
The spotlight was on Big Tech quarterly earnings last week and despite mostly disappointing results from the likes of Microsoft, Amazon, Alphabet (Google) and Meta Platforms (Facebook), the major stock averages posted strong gains. The big winner was the Dow Jones Industrial Average, which surged nearly 6%, while the S&P 500 Index jumped nearly 4%. It was the fourth straight week of gains for the Dow, which has risen over 14% in the month of October. The Nasdaq Composite Index, on the other hand, is up only 5% for the month as earnings results for the large technology companies with the biggest market capitalizations have not supported their lofty stock valuations. The disappointment began on Tuesday when Microsoft beat analysts’ estimates on the top and bottom lines but reported lower than expected revenue from its cloud business and lowered its quarterly guidance. Alphabet followed that report by missing revenue and earnings expectations as online advertising spending fell and the company announced that it would cut headcount growth by half in the fourth quarter. The bad news continued Wednesday when Meta Platforms badly missed on its quarterly revenue as spending on the metaverse reduced its profits and the company also issued a weak fourth quarter forecast. More of the same followed on Friday when retail giant Amazon reported weaker than expected earnings due to slowing growth in its cloud business and the company forecast that its online sales would grow only modestly in the holiday shopping season. The only bright spot in the Big Tech earnings season came from Apple as the company topped both revenue and earnings estimates, although iPhone sales and services revenue were lighter than forecast. Weakness in big technology company earnings was more than offset by better-than-expected profits from companies in other sectors of the market, though, and those strong results spurred the stock market rally. The dollar also retreated from its recent highs and stocks received a boost from declining Treasury yields last week as the 2-year fell to 4.4% and the 10-year dropped to 4%.
Gross domestic product (GDP) increased at a 2.6% annualized pace in the third quarter, which was better than expected and eased fears of a recession. The core personal consumption expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, rose 5.1% in September from a year ago, in line with estimates, and a relief for investors that it wasn’t any higher. New home sales in September tumbled over 10% as high home prices and high mortgage rates kept prospective homebuyers out of the market. Pending home sales also plunged and were much worse than expected. Durable goods orders in September rose modestly and were less than forecast while the final University of Michigan consumer sentiment index for October increased slightly from the previous month but remained relatively low.
The European Central Bank (ECB) raised its benchmark interest rate by three quarters of one percent, making it the third consecutive increase by the central bank.
For the week, the Dow Jones Industrial Average surged 5.7% to close at 32,861 while the S&P 500 Index jumped 4.0% to close at 3,901. The Nasdaq Composite Index climbed 2.2% to close at 11,102.
The October employment report is expected to show that about 200,000 new jobs were created and that the unemployment rate rose to 3.6% from 3.5%. The ISM Manufacturing and Services Purchasing Managers’ Indices (PMI) for October are both forecast to be slightly less than in September but still above 50, the threshold for expansion.
The Federal Open Market Committee (FOMC) announces its monetary policy decision and is expected to increase the federal funds interest rate by 75 basis points (a basis point is one hundredth of one percent) to a range of between 3.75% and 4%.
Among the most notable companies scheduled to report third quarter earnings this week are Advanced Micro Devices, eBay, BP, Devon Energy, Marathon Petroleum, ConocoPhillips, Duke Energy, Dominion Energy, Exelon, Clorox, Kellogg, Starbucks, Mondelez International, Hershey, Eli Lilly, Pfizer, CVS Health, Moderna, Emerson Electric, Newmont, Allstate, Humana, MetLife and Cigna.
Although this week will be another busy one for quarterly corporate earnings reports, investors will also be focused on the Federal Open Market Committee (FOMC) meeting and the Fed’s monetary policy decision. It is almost certain that the Fed will raise its federal funds rate by 75 basis points from the current range of between 3% and 3.25%. That would be the fourth straight hike of that size and increase the probability that the rate would be 4.4% by year-end. There is a sense among market participants that after this 75-basis point increase, the Federal Reserve will be less aggressive and raise the federal funds rate by only 50 basis points at its December meeting. Even more optimistic would be a pause by the Fed in December since there is a lag effect between interest rate hikes and their impact on inflation and the economy. Part of the reason for the strength in the stock market last week was the drop in Treasury yields as the 2-year fell to 4.4% and the 10-year briefly dipped below 4% from about 4.25% at the beginning of the week. Stocks also benefited from a decline in the dollar from its recent highs, allowing multi-national corporations to profit more on their exports overseas. Falling bond yields, a declining dollar and strong earnings from companies outside the technology sector were enough to overcome disappointing earnings from Big Tech and caused stocks to rally last week. Investors will be watching the Fed closely this week for clues about monetary policy in December and whether or not their optimism about future rate hikes is justified.