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Market Summary

Despite a series of strong third quarter earnings reports, U.S. equities finished off a turbulent week with mixed results. For the week, the S&P 500 ended about even, while the Dow gained 0.5% and the NASDAQ lost -0.6%, as defensive sectors like consumer staples and utilities continued to outperform growth sectors like information technology. U.S. 10-year Treasury yields ticked higher to 3.20% on renewed confidence in the Federal Reserve’s interest rate path.

According to FactSet, 82% of the first 89 constituents of the S&P 500 to report quarterly earnings have beaten the consensus earnings expectations and yet only 45% of reporters have had positive stock price returns following their earnings announcements. Any misses below expectations on earnings or sales have resulted in notable sell-offs. Generally, the blame for the weak stock price performance has been attributed to slowing sales growth and weaker forward looking guidance rather than the actual earnings results from the third quarter. Many investors are concerned of peaking corporate profit growth going into 2019 as the benefits of tax reform stimulus begin to fade and rising interest rates and higher input costs from tariffs weigh further on profit margins. As a result, the price that investors are willing to pay for earnings has declined with the growth outlook.

Looking abroad at the impact of the trade conflict, China's economic growth dropped to 6.5% year-over-year in the third quarter, marking the weakest pace since Q1 of 2009. While Chinese stocks initially dropped in response to the GDP figure, positive comments from lead Chinese economic officials and loosening corporate financing restrictions designed to encourage banks to increase lending to private firms pushed the Shanghai stock Composite up 2.6% on Friday and up over 1.8% in this week’s early trading.

Members of the Federal Reserve, undeterred by recent market volatility in the U.S. and abroad, have continued to promote the underlying strength of the economy looking ahead and have maintained conviction in the need for further gradual interest rate hikes. Investors will get important insight to the current health of the economy on Friday when the preliminary reading of third quarter GDP growth is released.

Economic Highlights: 

Housing: Rising mortgage rates and rising home prices driven by tight inventory continue to crimp home sales as existing home sales fell by 3.4% in September to the lowest point since the end of 2015.

Industrial Production: Despite tariff headwinds, U.S. Industrial Production exceeded expectations in September with 0.3% Month-over-Month growth versus the consensus of 0.1%. The growth was bolstered by higher mining and durable good production.

US Economy – The Week Ahead

Tuesday 10/23/2018

  • No Data

Wednesday 10/24/2018

  • New Home Sales – Consensus Estimate: 625K (-0.6% MoM), Prior Month: 629K (0.3% MoM)

Thursday 10/25/2018

  • Initial Jobless Claims – Consensus Estimate: 213,000 (1.4% WoW), Prior Week: 210,000 (-1.9% WoW)
  • Pending Home Sales Index – Consensus Estimate: 103.8 (-0.1% MoM), Prior Month: 104.2 (-1.8% MoM)
  • U.S. Durable Goods Orders Month-over-Month Growth – Consensus Estimate: -0.1%, Prior Month: 4.4%
  • Wholesale Inventories Month-over-Month Growth – Consensus Estimate: 0.6%, Prior Month: 1.0%

Friday 10/26/2018

  • U.S. Third Quarter GDP Growth Year-over-Year (Preliminary) – Consensus Estimate: 3.0% (3.3% QoQ), Prior Quarter: 2.9% (4.2% QoQ)
  • University of Michigan Consumer Sentiment Survey (Final) – Consensus Estimate: 99.0 (2.9% MoM), Prior Month: 96.2 (-1.7% MoM)
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