Here is Schwab's early look at the markets for Wednesday, October 22.
Netflix earnings disappointed late Tuesday and could help set the tone today. As a possible barometer of consumer sentiment, Netflix often has a big impact on the market, and that could be even more true at this odd juncture when investors lack government data to figure out retail sales, inflation, and jobs growth.
The streaming giant missed consensus earnings per share by a wide margin, while revenue came in basically as expected and the company stressed solid customer engagement. That's a key factor now that it doesn't report subscribership, but a little harder to measure.
The miss on earnings came as Netflix paid more than $600 million to settle a tax dispute with Brazilian authorities, the company said, and the matter isn't expected to affect results down the road. Even so, shares of the entertainment firm fell more than 6% in post-market trading and cast a bit of a pall ahead of Wednesday's session.
Those cloudy results marked a change from Tuesday's sunny earnings weather, when Coca-Cola, Lockheed Martin, and General Motors topped estimates. Hopes for a rate cut next week also lifted spirits, but investors seemed less enthusiastic about this year's strongest sectors--info tech and communication services-- and also sold off gold and silver.
Robust earnings and guidance from companies reporting to date have major indexes at or near all-time highs. About 84% of S&P firms reporting so far have beaten analysts' earnings estimates and 74% have delivered higher-than-expected revenue. Year-over-year earnings growth for companies reporting to date is nearly 13%, but it's still early and no mega-caps have reported up until now.
There's also hints of a "relief rally" underway as credit concerns ease and recent bank earnings impressed.
"However, underneath the surface of the index levels, we are getting some corrections within the frothy areas of the market, and I think it's tied to the October 10 drop of about 3% in the S&P 500 index," said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
The nearly 3% drop in the S&P 500 on October 10--the largest one-day decline since April--coincided with a mini "flash crash" in crypto that day, and speculative stocks in areas like quantum computing, drones, rare earth, and unprofitable tech names have subsequently fallen. Many are off 20% or more from recent highs.
Then gold and silver got hit by heavy selling on Tuesday, which suggests a rolling "risk off" mode for momentum. The question is whether this correction in speculative and momentum names spills over into the broader market, or if money flows to other, less volatile, perhaps lower valuation, areas.
"It's too early to say, but perhaps some caution is warranted," Peterson said.
Another possible sign of caution is rising Treasuries. The 10-year yield fell to another six-month low of 3.96% on Wednesday, and strength in Treasuries—which move the opposite of yields—is often a sign of money seeking perceived safety. The rally in Treasuries isn't fierce yet but bears watching, especially if investors seem more inclined to move money into defensive segments of the stock market.
Earnings so far appear to signal the corporate economy remains healthy despite tariffs and turbulence in D.C. That said, the reporting season isn't even 20% done, so investors might not want to draw conclusions from results so far. There've been other earnings seasons that stormed out of the gate only to lose their tailwind.
Tesla is a highlight this afternoon. The EV firm saw shares rally sharply in the third quarter as delivery figures improved and hopes grew for a trade truce with China, where Tesla makes and sells many vehicles. The trade situation and future production estimates are likely to come up on Tesla's earnings call, along with U.S. competition as companies compete for what might be a smaller EV pie after the recent withdrawal of government credits. Investors also await updates on Tesla's new Shanghai manufacturing hub, which has begun production ramp-up, Reuters reported.
Estimates for Friday's Consumer Price Index, or CPI, look firm. Analysts see year-over-year core CPI growth of 3.1%, well above the Fed's 2% target. Core excludes food and energy.
Investors still expect a rate cut at the Federal Reserve's meeting next week and another in December, according to the CME FedWatch Tool. Futures trading builds in 97% chances of at least a 25-basis point cut on October 29, and similar chances of a follow-up cut in December.
The U.S. government shutdown makes the Fed’s job difficult because policy makers won’t get the normal flow of data. Instead, central bankers will likely rely on private data, regional Fed surveys, and other information.
There was talk on Capitol Hill yesterday about how to structure a possible deal to reopen the government, Politico reported, but it's still in the early stages.
"There has been little movement to resolve the current standoff," said Michael Towsnsend, managing director, legislative and regulatory affairs at Schwab.
The dollar climbed Tuesday as gold sold off and is nearing short-term highs for the dollar index above 99. Tailwind from a dropping dollar has helped U.S. corporate earnings so far this year, so any prolonged increase in the dollar's value may be something to contend with for investors. Still, tariff, trade, and shutdown uncertainty could keep the dollar in check.
Major indexes vacillated between positive and negative territory Tuesday with the DJIA taking the lead, burnished by strong earnings from Coca-Cola and continued strength at Apple. The lean toward cyclical stocks in the DJIA contrasts with this year's tech-fueled rally but may suggest a broader footing that could be a healthy development. The percentage of stocks in the S&P 500 trading above their respective 50-day moving averages soared this week to just under 55% by late Tuesday, well above recent lows below 40% and an indication of the rising tide lifting more boats.
Consumer discretionary easily led all S&P 500 sectors yesterday, possibly keying off solid sector earnings. Amazon and Apple—also with consumer products on their shelves—picked up strength as well ahead of earnings from both next week. In other consumer-related action, Warner Bros Discovery jumped double digits Tuesday as Bloomberg reported that Netflix and Comcast are both interested in buying the company.
Behind discretionary, industrials, health care and financials led the way Tuesday, but the tech sector stayed relatively quiet. Nvidia finished lower again and well off recent record highs, chipped by competitive worries. Utilities—once a defensive area but now closely linked to the AI market as data center power demand surges—dropped more than 1% and finished last on the sector scoreboard.
In individual action Tuesday, Coca-Cola rose almost 4% after reporting third-quarter earnings that beat expectations and reaffirming guidance.
General Motors jumped more than 12% after the automaker easily topped analysts' estimates for earnings and revenue and raised its full-year guidance.
3M posted stronger-than-expected earnings and shares rose more than 7% Tuesday. The manufacturing firm's sales, a good barometer of consumer and industrial demand for everything from fire protection to tape, also beat forecasts and 3M raised guidance.
The Dow Jones Industrial Average® ($DJI) gained 218.16 points Tuesday (+0.47%) to 46,924.74; the S&P 500 index (SPX) rose 0.22 (0%) to 6,735.35, and the Nasdaq Composite® ($COMP) fell 36.88 points (-0.16%) to 22,953.67.