Earnings reports from companies led by Tesla and Netflix will provide a deeper look at U.S. corporate profits in the coming week, and a delayed U.S. inflation release will mark another test for the stock market, which has become shakier even as it remains around record highs.
The fourth year of the S&P 500’s bull run kicked off this week with some significant gyrations after a long period of market calm. The CBOE market volatility index on Thursday ended at its highest closing level in nearly six months.
“The market is becoming more volatile, but it’s also coming off of a very non-volatile period where we didn’t have a lot of risk catalysts bubbling to the top,” said Michael Reynolds, vice president of investment strategy at Glenmede. “Once you have valuations hit sort of full levels, as we’re seeing now almost across the board, you have to be on the lookout for incremental risk catalysts.”
The spark for the latest bout of volatility has been a surprise rise in U.S.-China trade tensions after tariffs had receded as a major issue for markets in the past few months. Stocks slumped last Friday after the U.S. threatened to implement a 100-per-cent increase in tariffs by November 1 after the country balked at China’s rare earth controls.
U.S.-China back and forth will be key for markets in the coming week, said Doug Beath, global equity strategist at Wells Fargo Investment Institute, with the expectation that U.S. President Donald Trump and Chinese leader Xi Jinping will meet later this month. Sharp declines in shares of regional banks on Thursday that weighed on markets also kept investors on edge.
Stocks are on pace for a strong year. The benchmark S&P 500 is up nearly 13 per cent year-to-date and within roughly 2 per cent of its record high. But along with recent rockiness, there are signs the market is weakening under the surface.
The percentage of S&P 500 stocks trading in some form of an uptrend has declined from 77 per cent in early July to 57 per cent as of Tuesday, according to Adam Turnquist, chief technical strategist for LPL Financial, who analyzed the stocks compared to their moving averages over short-to-long term timeframes. The percentage of stocks trading in a downtrend has increased from 23 per cent to 44 per cent over that period since early July.
That “narrowing gap highlights emerging cracks in the market’s foundation,” Turnquist said in written commentary. Similarly, Kevin Gordon, senior investment strategist at Charles Schwab, said he will be watching the extent to which massive stocks are responsible for the market’s gains going forward.
“If you have a fewer number of companies that are actually moving higher, but the indexes do move higher because of the megacaps, that’s a really important divergence,” Gordon said.
Attention will be on third-quarter earnings after major banks started the reporting season on a strong note. Aside from streaming giant Netflix (NFLX-Q) and electric vehicle maker Tesla (TSLA-Q), other companies due to report in the coming week include consumer companies Procter & Gamble (PG-N) and Coca-Cola (KO-N), aerospace and defence giant RTX (RTX-N) and tech stalwart IBM (IBM-N).
The corporate results and executive comments will offer a view into the economy at a time investors are lacking their typical data flow due to the U.S. government shutdown. Because of the ongoing shutdown, which began on October 1, releases including the monthly employment data have been delayed.
“(Corporate) reports and what companies say is really our best chance at assessing what the broader economic health is,” Gordon said.
The government has said it will release the U.S. consumer price index for September on Friday, nine days after it was originally scheduled, saying the CPI data allows the Social Security Administration to meet deadlines related to timely payment of benefits.
The CPI report, which is closely watched for gauging inflation trends, will be released days before the Federal Reserve’s next monetary policy meeting on October 28-29. The U.S. central bank is widely expected to cut interest rates by a standard quarter percentage point again, after weakening jobs data prompted the Fed to lower rates last month for the first time this year.
“We’d really have to see something out of left field in terms of notable inflation pressures to knock the Fed off of a rate cut path at the October meeting,” Glenmede’s Reynolds said.
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