U.S. equity markets posted mixed performance last week as investors sifted through a diverse range of quarterly corporate earnings results and gauged the market implications of simmering geopolitical tensions in the Middle East as well as the upcoming election. For the week, the tech-heavy Nasdaq managed to eke out a 0.2% gain, but the S&P 500 broke a six-week streak of gains with a 1.0% loss and the Dow Jones Industrial Average tumbled even further falling 2.7%. The wide dispersion in results last week was driven by negative earnings reactions for a host of industrial giants including GE Aerospace (GE), Honeywell (HON), Boeing (BA), and 3M (MMM), whereas tech stocks generally fared better, headlined by a well-received report from Tesla (TSLA). Recent weakness in energy stocks has extended into this week’s early trading due to a large pullback in oil prices after Israeli strikes on Iran over the weekend were limited to military targets, avoiding oil and nuclear sites. Energy prices will likely remain volatile as tensions continue to escalate with Iran vowing to retaliate.

As we enter the final countdown to next Tuesday’s presidential election and early voting kicks off in most states, market participants are increasingly trying to dial in on the potential ramifications for policy. Current polling generally suggests a tight race between Harris and Trump, though Trump appears to have the edge in battleground states. In particular, investors are focused on the potential for a rising fiscal deficit and growing government debt burden under either candidate. A sweep of the White House and Congress for either party would likely be met with expectations for a larger increase in the deficit, whereas divided control of the White House and Congress would suggest greater potential for gridlock on policy changes.

Alongside resilient economic growth and inflation data, the rising focus on the fiscal deficit is putting upward pressure on interest rates with the 10-year Treasury yield now approaching 4.30%, which is up over 0.65% from the September lows. Additionally, the market has priced out roughly 0.75% of rate cuts through 2025 over the last 6 weeks, according to FactSet. Market probabilities now point toward five more quarter-point rate cuts between now and the end of 2025 rather than the eight cuts forecasted in early September.

Corporate earnings also remain front and center for investors. With over 37% of the earnings announcements of the S&P 500 index members in the rearview mirror, third quarter corporate earnings season has been a mixed bag so far. On the positive side, technology companies, particularly those levered to artificial intelligence and surging investment in data centers, have continued to surprise to the upside. According to consensus estimates in FactSet, the information technology sector is expected to deliver earnings per share growth of over 15% year-over-year and account for almost 90% of the S&P 500’s growth on the quarter (which is tracking toward just 3-4% EPS growth in aggregate compared to a year ago). Outside of companies exposed to the AI/data center theme, the fundamental growth picture has been more challenging. In particular, industrial and consumer staples stocks have fallen short of expectations with muted organic growth and falling pricing power, while the energy and materials sectors are reporting negative earnings growth as anticipated as a range of commodity prices have been under pressure.

Looking ahead, this week will be the busiest week of earnings season with over a third of S&P 500 set to report earnings, including five of the Magnificent 7 tech giants (Alphabet, Amazon, Apple, Meta Platforms, & Microsoft are all on the docket). With these index heavyweights reporting, this week’s reporters account for 44% of the weight of the S&P 500 based on market capitalization. Artificial intelligence will remain the key theme for the Magnificent 7 as the companies are under increasing pressure from investors to outline plans showing the incremental revenue growth opportunities associated with their massive AI/data center capital investments.

Aside from corporate earnings, this week will provide several important economic data points on inflation, manufacturing, and labor, including the release of the October jobs report on Friday. Net payroll gains are expected to have been more modest in October than previous months (the consensus economist forecast is for 122.5k net new payrolls), reflecting the headwinds from the hurricanes in the southeast and the Boeing strike in the northwest. However, weekly initial unemployment insurance claims have fallen faster than expected after spiking earlier this month due to these factors.