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Stocks Declined in a Busy Day Full of Economic and Earnings Report



U.S. equities ended the day lower, giving up initial gains that came amid optimism surrounding a reversal in the U.K.'s controversial tax plans. Treasury yields rose following an initial decline earlier in the day, and most global bond rates, particularly those in the U.K., moved higher. The U.S. dollar gained ground amid tumbles in the British pound and the euro, while crude oil and gold prices fell. Q3 earnings season kicked into gear with the release of mixed results from some banking sector heavyweights, as Dow member JPMorgan Chase and Citigroup both bested estimates, but Morgan Stanley and Wells Fargo fell short. Meanwhile, shares of Dow component UnitedHealth increased after beating estimates and upping its guidance. In other equity news, Kroger agreed to buy Albertsons Companies in a deal worth roughly $24.6 billion. The economic calendar came in heavy, with retail sales coming in flat for last month and a slightly larger-than-expected decline in import prices, putting the final touches on the September inflation picture. Additionally, consumer sentiment was surprised to the upside, and business inventories rose. Markets in Asia rallied in the wake of yesterday's solid gains in the U.S., while European stocks closed out higher following Prime Minister Truss' press conference.

The Dow Jones Industrial Average decreased 404 points (1.3%) to 29,635, the S&P 500 Index fell 87 points (2.4%) to 3,583, and the Nasdaq Composite tumbled 328 points (3.1%) to 10,321. In moderate volume, 4.2 billion shares of NYSE-listed stocks were traded, and 4.3 billion shares changed hands on the Nasdaq. WTI crude oil lost $3.50 to $85.61 per barrel. Elsewhere, the gold spot price declined $27.80 to $1,649.20 per ounce, and the Dollar Index rallied 0.9% to 113.26. Markets ended mixed for the week, as the DJIA gained 1.2%, while the S&P 500 declined 1.6%, and the Nasdaq Composite dropped 3.1%.

Dow member JPMorgan Chase & Co. (JPM $111) reported adjusted Q3 earnings-per-share (EPS) of $3.12, above the $2.90 FactSet estimate, with revenues rising 10.4% year-over-year (y/y) to $33.5 billion, north of the Street's forecast of $32.1 billion. JPM said net interest income jumped 34% during the quarter to $17.6 billion due to higher interest rates and that its loan portfolio grew above analysts' expectations. However, Chief Executive Officer (CEO) Jamie Dimon cautioned that while businesses and consumers were robust during the period, there are immediate headwinds, notably high inflation, higher global interest rates, the uncertain impacts of quantitative tightening, and increasing geopolitical risks, adding "While we are hoping for the best, we always remain vigilant and are prepared for bad outcomes." Early signs of these challenges appeared in the latter part of the quarter, as JPM posted $959 million in securities losses, reflecting a loss of $0.24 per share. JPM traded higher.

Morgan Stanley (MS $75) posted adjusted Q3 EPS of $1.47, short of the expected $1.52, with net revenues declining 12.0% y/y to $13.0 billion, below forecasts for $13.3 billion. The company's investment banking revenues tumbled over 55% from a year ago, and investment management receipts were also impacted by the market environment, while its fixed income and wealth management division fared better but also navigated a challenging market. Shares were lower.

Wells Fargo & Company (WFC $44) reported an adjusted Q3 profit of $0.85 per share, well below the Street's expectation of $1.09 per share, as revenues rose 5.3% y/y to $19.5 billion, topping the forecasted $18.8 billion. Net interest income rose roughly 24% y/y to $12.9 billion, above the FactSet estimate for $12.4 billion. WFC cited the impacts of operating losses related to litigation, customer remediation, and regulatory matters for the shortfall. However, CEO Charlie Scharf said, "Our top priority remains strengthening our risk and control infrastructure, which includes addressing open historical issues and issues that are identified as we advance this work. As we have said several times, we remain at risk of setbacks as we work to complete the work and put these issues behind us, and expenses this quarter reflect our ongoing efforts." Shares are trading to the upside.

Dow component UnitedHealth Group Incorporated (UNH $513) reported adjusted Q3 EPS of $5.79, above the expected $5.43, on revenues of $80.8 billion, an 11.8% increase y/y and eclipsing expectations of $80.5 billion. Looking ahead, the company upped its full-year 2022 adjusted net earnings outlook to a range of $21.85 to $22.05 per share, compared to previous guidance of $21.40 to $21.90 per share and the FactSet estimate of $21.87. Shares were slightly higher.

In M&A news, Kroger Co. (KR $43) announced that it has agreed to buy Albertsons Companies Inc. (ACI $26) for $34.10 per share in a transaction valued at $24.6 billion, a 17.4% premium over yesterday's closing price. The tie-up will combine the second and fourth-largest grocers in the U.S., respectively. Both companies' boards approved the deal, which will need to pass regulatory scrutiny. Shares of both companies were lower.

The S&P 500 ended a six-straight day of declines yesterday despite CPI data that showed that inflationary pressures have persisted, which has forced the Fed to aggressively tighten monetary policy and boosted concerns about the economy, as discussed in the article, Stock Market Volatility: Jobs Report Kills Rally. Meanwhile, as the markets gear up for the start of Q3 earnings season next week, Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her article, Earnings: Trampled Under Foot? how the bear market has been driven by multiple compression, making valuations look relatively compelling, but expected weakness in earnings may limit the upside potential for stocks. You can follow Liz Ann on Twitter: @LizAnnSonders.

Additionally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his latest article, The End of Earnings Growth?, how the earnings outlook is dimming as the economy slows, which could result in cuts to earnings forecasts and downside for stocks. However, Jeff points out that U.K. earnings have been a surprising outperformer. You can follow Jeff on Twitter: @JeffreyKleintop.

Read all our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.Retail sales flat, import prices fall, sentiment surprises to the upside Advance retail sales (chart) for September were flat month-over-month (m/m), versus the Bloomberg consensus forecast of a 0.2% increase, and compared to August's downwardly adjusted 0.3% advance. Last month's sales ex-autos ticked 0.1% higher m/m, compared to expectations of a 0.1% dip, and as August's figure was revised higher to 0.1% decline. Sales ex-autos and gas were up 0.3% m/m, above estimates of a 0.2% rise, and compared to August's upwardly adjusted 0.6% rise. The control group, a figure used to calculate GDP, came in 0.4% higher m/m, versus projections of a 0.3% gain, and following August's favorably revised 0.2% reading. The Import Price Index fell by 1.2% m/m for September, versus estimates of a 1.1% drop, and compared to August's negatively revised 1.1% decrease. Versus last year, prices were up by 6.0%, below forecasts of a 6.2% increase and lower than August's unrevised 7.8% rise.

The preliminary University of Michigan Consumer Sentiment Index (chart) for October showed that sentiment improved more than expected, rising to 59.8 from September's final reading of 58.6, above the Bloomberg consensus estimate calling for a slight increase to 58.8. The index continued to move off the record low seen in June as a noticeable increase in the current conditions portion of the index more than offset a decline in the expectations component of the report. The 1-year inflation forecast increased to 5.1% from 4.6% in September, and the 5-10-year inflation outlook rose to 2.9%, from 2.7%.

Business inventories rose 0.8% m/m in August, below forecasts of a 0.9% increase, after July's downwardly revised 0.5% advance.

Treasury yields finished higher, as the yields on the 2-year note and 10-year note were up 7 basis points (bps) to 4.52% and 4.02%, respectively, while the 30-year bond rate increased 6 bps to 3.99%.

Volatility has spiked recently as markets react to concerns about the ability of the global economy to cope with the rise in bond yield across the globe as monetary policies tighten. The Fed has led the charge, and Schwab's Chief Fixed Income Strategist Kathy Jones discusses this in her latest article, Markets to Fed: Slow Down, You Move Too Fast, and how, if these trends continue, the Fed may end up slowing its pace of tightening—but not stopping it. You can follow Kathy on Twitter: @KathyJones. Along with rising bond yields, the U.S. dollar has rallied, and Schwab’s Liz Ann Sonders examines the impact of the greenback’s rise in her article, Ripple(s) From Surging Dollar. She discusses how while a spike in global market volatility has prompted some investors to think a Fed response is imminent, we caution against thinking that intervention is a bullish development.

Looking ahead to next week, Q3 earnings season will start to heat up and will likely garner the most attention, but the economic calendar will also offer some key data points that could shape market action. Housing will be in focus, courtesy of the NAHB Housing Market Index, housing starts and building permits, existing home sales, as well as the weekly read on the MBA Mortgage Applications Index. Also of note will be the Federal Reserve's Beige Book—an anecdotal read on national business activity used by policymakers to prepare for their next monetary policy decision set to come on November 2—as well as the Fed's industrial production and capacity utilization report for September. Other items of note include the Leading Index for last month, reads on regional manufacturing activity out of New York and Philadelphia, and initial jobless claims for the week ended October 15.


Europe higher amid U-turn in U.K. tax plan


Stocks in Europe ended higher following a press conference by U.K. Prime Minister Truss, who announced adjustments to the recently proposed tax plan. Truss said the pledge to reverse the prior finance minister's hike in the corporate rate to 25% from 19% will be scrapped, a move that follows a prior decision to abandon its plan to cut taxes for the highest income earners. In her comments, Truss said, "It is clear that parts of our mini-budget went further and faster than the markets were expecting." Before the presser, it was announced that finance minister Kwarteng offered his resignation after being asked to step down after only six weeks in the role. U.K. bond yields relinquished solid early losses and finished noticeably higher following the news, while the British pound lost ground against the U.S. dollar. Meanwhile, the euro was also lower versus the greenback, and bond yields in the Eurozone were mostly higher, with Switzerland’s yields being the exception. More inflation data in the region was released, with consumer prices in both France and Spain falling more than forecasts on an m/m basis but remaining elevated y/y, while the Eurozone's trade deficit widened in August. The worrisome inflation picture has been exacerbated by the ensuing energy crisis in the region due to the escalating war in Ukraine. Schwab's Jeffrey Kleintop notes in his article, What's Next: Good, Bad, & Ugly, that the persistence of global inflation could determine which of the three paths central banks may follow and which market qualities investors might consider for their portfolios.

The U.K. FTSE 100 Index ticked up 0.1%, France's CAC-40 Index increased 0.9%, Germany's DAX Index and Italy's FTSE MIB Index gained 0.7%, Spain's IBEX 35 Index advanced 0.5%, and Switzerland's Swiss Market Index traded 1.0% higher.


Asia posts widespread gains in wake of U.S. rally


Stocks in Asia finished broadly higher on the coattails of the rally in the U.S. markets yesterday, as the markets appeared to shrug off yesterday's hotter-than-expected inflation report in the U.S., as well as in China. Wholesale prices in the Asian nation moderated slightly, while consumer prices rose to their highest level since April 2020, but core inflation—which excludes food and energy—was subdued, keeping deflation concerns intact. Chip stocks, which have suffered lately following the recent expansion of restrictions on the exportation of certain types of semiconductor chips to China, outperformed, as did growth-oriented sectors. However, renewed COVID restrictions in China amid a rise in new cases remained an overhang.

While other major central banks tighten policy, Japan has maintained its accommodative stance, and China has actually provided further stimulus, which has weighed on their respective currencies. Schwab's Jeffrey Kleintop provides commentary on China's situation in his article, China Q&A: Top 5 Questions, discussing various topics, including inflationary concerns, currency movements, government policies, and more. In other economic news in the region, South Korean unemployment bounced off last month's drop to a record low and slightly higher than forecasts.

Japan's Nikkei 225 Index rallied 3.3%, with the yen plunging to its lowest level versus the U.S. dollar since 1990 before paring some of those losses. China's Shanghai Composite Index gained 1.8%, and the Hong Kong Hang Seng Index advanced 1.2%. South Korea's Kospi Index rose 2.3%, Australia's S&P/ASX 200 Index increased 1.8%, and India's S&P BSE Sensex 30 moved 1.2% higher.

Next week's international economic calendar is set to deliver some key reports that could move the markets, headlined by a loaded docket out of China, which will bring the releases of Q3 GDP, industrial production, and retail sales. Japan will release industrial production, retail sales, CPI, trade data, and its Tertiary Industry Index. In the Eurozone, consumer sentiment data will be reported, along with CPI, while Germany will offer its ZEW Economic Sentiment Survey and PPI. Finally, the U.K. will announce reports on CPI, PPI, the Retail Price Index, and retail sales.

 

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