In a week that has thus far been dominated by a heavy slate of third-quarter earnings results, Wall Street received some important reports on the U.S. economy this morning, headlined by the first estimate on the third-quarter gross domestic product (GDP). At 8:30 A.M. (EDT), the Commerce Department reported that GDP advanced by an annualized rate of 2.6%, which was better than the consensus forecast and a reversal from two consecutive quarterly contractions to start 2022. Notably, the core Personal Consumption Expenditures (PCE) deflator (a gauge of inflation watched by the Federal Reserve) was 4.5%, which showed some easing in prices during the three-month period. The equity futures, which were mixed heading into the GDP release, are still indicating such a start when trading opens stateside.
In addition to the much-anticipated GDP report, we also learned from the Labor Department that initial unemployment claims for the week ending October 22nd, totaled 217,000, which was up modestly from the previous-week’s tally of 214,000, but below expectations. Meanwhile, orders for durable goods, which are tangible products that can be stored or inventoried and have an average life of at least three years, increased 0.4% in September, which was an improvement from the August decline of 0.2%. However, the figure fell short of the Wall Street consensus. All in all, today’s economic data indicate that the U.S. economy may be doing a little better than most economists expected given the Federal Reserve’s increasingly restrictive monetary policies. It also may give central bank policymakers more leeway to continue hiking interest rates to combat inflation. This could present an ongoing difficult backdrop for equities, particularly those of the higher-growth companies, and bonds.
As noted above, it has been a hefty week of earnings news, led by a number of the mega-cap technology companies. After yesterday’s closing bell we received quarterly results from several prominent companies. Of note, shares of Meta Platforms (FB), the operator of Facebook, WhatsApp, and Instagram, are down sharply (more than 20%) in pre-market action after the company’s earnings fell to $1.64 a share, which was well short of the consensus forecast of $1.89. The tech company also lowered its near-term profit expectations on continued currency headwinds, and many questions on Wall Street have emerged about the heavy investments in the metaverse, a virtual world in which people live, work, shop and interact with others -- all from the comfort of their couch in the physical world.
The Meta results come on the heels of disappointing quarterly reports and profit outlooks from technology behemoths Alphabet (GOOG), the parent company of Google, and Microsoft (MSFT) yesterday. That made for a bifurcated performance for the stock market yesterday. The disappointing tech results weighed on the tech-heavy NASDAQ Composite, while the Dow Jones Industrial Average, helped by strong quarterly results from electronic payments processor Visa (V), finished slightly in positive territory and the small-cap Russell 2000 advanced a half-percentage point.
We are looking at a similar performance again today. The Meta results are weighing on the NASDAQ futures, while positive quarterly results from Merck & Co. (MRK) McDonald’s (MCD), Honeywell (HON), and Caterpillar (CAT) are powering the Dow-30 futures higher. One positive from the technology space was the latest quarterly result from ServiceNow (NOW). The tech stock is pointing sharply higher after the company topped profit expectations and subscription revenues grew 22% from a year ago. After today’s closing bell, all eyes will again be on technology, with the release of quarterly results from industry leaders Apple (AAPL) and Amazon.com (AMZN).
This week, the equity market, in addition to better-than-feared quarterly results, has been helped by a pullback in Treasury market yields and a weakening of the U.S. dollar. For much of this year, stocks have moved in the opposite direction of Treasury yields and that is certainly the case the last few trading sessions. This backdrop, though, may prove to be short-lived, as next Wednesday, the Federal Reserve is expected to raise the benchmark short-term interest rate by another 0.75%, to a range of 3.75% to 4.00%. This would mark the fourth-straight three-quarter-point hike by the Federal Open Market Committee, as the central bank aggressively tries to fight stubbornly high inflation. Next week, the market also is expected to closely watch what Federal Reserve Chairman Jerome Powell says about future interest-rate policy. Whether the Chairman’s remarks on monetary policy are determined to be more hawkish or dovish will probably play a huge role in which direction trading takes.
In general, the worries about interest-rate hikes and the overall disappointing quarterly results of late from technology companies seems to be pushing investors away from the higher-growth, but often less profitable, tech companies and into the more value-oriented cyclical companies. The communication services stocks remain among the biggest laggards in recent trading sessions. – William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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