The financial markets faced a challenging week, driven by rising bond yields, mixed performance in equities, and mounting geopolitical tensions. The S&P 500 snapped its six-week streak of gains, ending slightly lower as investors turned their focus to surging bond yields. Yields on the U.S. 10-year Treasury rose to 4.25%, a level not seen since July, largely due to strong economic data and a substantial issuance of new government bonds totalling $183 billion.
The University of Michigan (UMich) Consumer Sentiment Index added another layer of complexity to the picture. One-year inflation expectations declined to 2.7%, a welcome development for policymakers and investors alike. However, the long-term inflation outlook remained steady at 3.0%, with the average 5-10 year inflation expectation hitting an alarming 6.6%, the highest since 1985. This divergence is uncommon and points to a complex inflationary outlook moving forward, though for the time being, markets are not reacting strongly to these discrepancies.
Equities saw a varied performance, with growth stocks outperforming value stocks once again, continuing a trend that has dominated the market this year. The standout performer was Tesla, whose stronger-than-expected earnings gave a boost to the S&P 500 Growth Index. In contrast, value sectors such as industrials and financials struggled, weighed down by the rising bond yields and economic uncertainty.
The commodities market also saw significant movement, with West Texas Intermediate (WTI) crude oil gaining 2.3%, closing near $72 per barrel. The rally was driven by heightened geopolitical risks, particularly in the Middle East, where tensions between Iran, Israel, and Saudi Arabia have been escalating. Although there was a brief pullback in prices midweek on rumours of potential ceasefire talks, oil rebounded quickly, supported by a risk premium tied to the conflict.
In the bond market, longer-dated bonds faced heavy selling pressure as investors shifted towards shorter durations in response to rising yields and the upcoming U.S. presidential election. Despite the sell-off in bonds, large-cap tech stocks maintained investor confidence, as evidenced by the tight spread between their bonds and those of the broader S&P 500.
As we move into the next week, a series of critical events will drive market movements, particularly in the tech sector and fixed income markets. Investors should prepare for increased volatility as earnings season continues and key economic data is released.
1. Tech Earnings: High Expectations with Caution
Next week, the spotlight will be on tech giants Apple, Microsoft, Alphabet, Meta, and Amazon, as they are set to report their Q3 earnings. These companies, which make up a significant portion of the Magnificent Seven, are expected to provide insights into how well the tech sector is holding up in the face of rising costs and softening growth.
Apple: Analysts expect a 7.5% year-over-year increase in EPS, with a heavy focus on iPhone sales, which have underperformed over the past two quarters.
Alphabet: Although the company is expected to post an 18% rise in EPS, concerns remain over increasing investments in AI and cloud services, which are affecting margins.
Meta: Forecasted to deliver 20% EPS growth, Meta’s results will highlight how well its shift to AI and its advertising business is faring in a more competitive landscape.
Amazon: The focus here will be on Amazon Web Services (AWS), with expected EPS growth of 23%. Investors will look for guidance on how AWS is handling competition and slowing global growth.
While tech earnings are expected to remain robust, slowing growth could temper enthusiasm. However, with the U.S. economy still growing at a solid pace, as indicated by the Atlanta Fed's GDPNow estimate of 3.4% for Q3, growth stocks should remain a strong favourite among investors.
2. Bond Market: Rising Yields and Election De-Risking
The bond market will remain a critical area of focus as investors digest fresh economic data and brace for the upcoming U.S. presidential election. Last week’s surge in bond yields was driven by a combination of strong economic data, heavy Treasury issuance, and a flight to safety amid rising geopolitical tensions.
Supply Pressure: With $183 billion in new U.S. debt issued, yields are under upward pressure as investors demand higher returns to absorb the supply.
Geopolitical Tensions: Ongoing conflict in the Middle East and the uncertain outcome of the U.S. election have led investors to shift towards safer assets, further pushing yields higher.
Inflation: While short-term inflation expectations have moderated, long-term inflation remains elevated, which is sustaining demand for higher yields.
Investors have been de-risking their portfolios by shedding longer-dated bonds and focusing on shorter-duration assets. This trend is expected to continue as the U.S. election approaches, with polls indicating a tight race that could lead to increased market volatility.
3. Commodities: Oil Prices Driven by Geopolitical Risks
The commodities market, particularly oil, will remain highly sensitive to geopolitical developments in the Middle East. Any escalation in the conflict between Israel, Hamas, and Iran could push oil prices even higher, especially if there are disruptions to global supply chains. Additionally, the Organization of Petroleum Exporting Countries (OPEC) is expected to provide updated guidance on production levels, which could act as a stabilizing force if output is reduced.
4. Equities: Growth Continues to Outpace Value
Growth stocks are expected to continue outperforming their value counterparts, supported by superior earnings growth in the tech sector. The S&P 500 Growth Index has consistently outpaced the S&P 500 Value Index this year, a trend that is likely to persist unless there is a significant shift in the economic landscape.
That said, value stocks could make a comeback in 2024 if earnings growth in non-tech sectors begins to improve. However, for the time being, growth stocks remain the favoured choice for investors, particularly as the U.S. economy continues to grow.
5. Gold: A Safe Haven in Uncertain Times
Gold remains an attractive hedge against inflation and geopolitical risks. With long-term inflation expectations still high, and potential volatility surrounding the U.S. presidential election, gold is expected to remain in demand as a safe-haven asset. The upcoming election could add further uncertainty, particularly if it leads to significant fiscal changes that push inflation higher.
Tech Earnings Reports: Apple, Alphabet, Amazon, Meta, and Microsoft are all set to release their Q3 earnings. These results will provide crucial insights into the health of the tech sector and set the tone for the broader market.
Oct. 31: JOLTS Job Openings Report – A key indicator of labour market conditions, offering insight into job vacancies and hiring trends.
Nov. 1: ADP Employment Report – Private sector employment data ahead of Friday’s non-farm payrolls report.
Nov. 3: U.S. Non-Farm Payrolls Report – A comprehensive look at the health of the U.S. labour market, which could have a significant impact on bond yields and Fed policy expectations.
OPEC Guidance: Markets will be watching for any signals from OPEC regarding future production levels, which could influence oil prices.
Overall, the coming week is set to be eventful, with a focus on tech earnings, bond market dynamics, and geopolitical risks. Investors should prepare for increased volatility, particularly in the bond market, where rising yields are putting pressure on equities. Maintaining a balanced portfolio with exposure to both growth and value stocks, while positioning for opportunities in the bond and commodity markets, will be essential for navigating this complex environment.