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Before The Bell - The major equity averages will begin the final trading week of October on a three-week winning streak. This is quite remarkable following a very volatile stretch in September and an uneven start to this month. The investment community started the month starring at a “wall of worry,” which included concerns about inflation, slowing domestic growth, a contentious environment on Capitol Hill that has led to a stalemate on legislation, including an infrastructure bill, and the lingering Delta variant strain of the coronavirus, but since the start of supportive third-quarter earnings season the U.S. equity market has been on an upward trajectory. The S&P 500 Index begins today up 5.5% this month, which if it holds or extends those gains over the next five trading days, would be its best monthly performance since November of 2020.

The third-quarter earnings season, which commenced on October 13th with a superb quarterly report from JPMorgan Chase (JPM), has thus far been a very good one for Corporate America, and investors have responded in kind, with an increased appetite for risk over the last fortnight. The results, particularly from the big banks, have been strong, but what has really pleased Wall Street is the encouraging outlooks for most of the S&P 500 companies. Investors entered the month worried that a slowing U.S. economy, hurt by the COVID-19 Delta variant, would begin to be seen in the guidance from the corporate world, but such has not materialized, with many of the Dow-30 companies, save for International Business Machines (IBM) and Intel (INTC), encouraged about the next 12 months. This has enabled investors to look pass some of the aforementioned problems and bid stocks higher. The Dow Jones industrial finished Friday at a record high (its 36th this year, but first since mid-August) after adding 74 points in the week’s final session. 

However, the Dow 30, helped by a strong report by American Express (AXP), was the lone advancer on Friday. Overall, it was a mostly bearish session (decliners led advancers by a comfortable margin), with the NASDAQ, S&P 500 Index, and the small-cap Russell 200 all finishing in the red. The technology sector, even with a pullback in bond yields, an event that often helps the high-growth sector, finished 126 points lower, pulled down by a poor showing from the semiconductor and social media issues. The semiconductor group was hurt by a negative reaction to Intel’s quarterly results on Thursday evening, while a sharp drop in Snap (SNAP) shares (down more than 25% on Friday) hurt the social media sector. Intel cited supply chain issues, which has slowed the production of semiconductor chips, as the reason for its subpar performance and near-term struggles. Conversely, the cyclical stocks fared well, with gains recorded in the industrial, materials, and energy spaces. These sectors could get a boost this week if the Biden infrastructure plan is passed by Congress.

Looking at the week at hand, investors will again be closely monitoring the news from the earnings and business beats. The earnings news, which will include reports from 30% of the S&P 500 companies, will be headlined by the technology space, with results due from many of the industry heavyweights, including Apple (AAPL), Alphabet (GOOG), Microsoft (MSFT), Facebook (FB), and Amazon.com (AMZN). Investors will be looking to see if the supply-chain disruptions, particularly the semiconductor chip shortage, have had any negative impact on these companies. The commentary from Apple, which said that it will have to cut iPhone 13 production on chip shortages, will be closely tracked. Our sense is that the FAANG stocks will report strong quarterly results, with Facebook, which has been under fire in recent weeks, up first after today’s closing bell.

Meantime, it also will be a busy week of news on the U.S. economy, with the headline reports being the latest reading on consumer confidence tomorrow morning and the first estimate of third-quarter GDP on Thursday. We will also get the September figures for new home sales, durable goods orders, and personal income and spending. The consumer confidence and personal income and expenditures data will be scrutinized for clues to how the consumer is feeling ahead of the all-important holiday shopping season, which unofficially commences on Black Friday one month from today.

Before the bell, the equity futures are indicating a positive, though mostly flattish, opening for the U.S. equity market. Our sense is that investors may be catching their breath today after a very bullish stretch for stocks and ahead of a barrage of earnings news that will begin in earnest after today’s closing bell.  - William G. Ferguson

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.