Stocks sold off for a third straight session as mixed quarterly earnings, rising election anxiety and downbeat housing data sparked another run out of risk assets.
Of the market's 11 sectors, only real estate and utilities finished in the green on Wednesday, hurt by mixed quarterly reports and disappointing guidance from major names. Market participants usually care more about a company's financial forecast than its most recent performance, but that's especially true this earnings season, experts say.
"The equity market is extremely fragile considering the headwinds that are lurking right around the corner," writes José Torres, senior economist at InterActive Brokers. "Earnings expectations are buoyant for next year, which increases the importance of forward guidance rather than past results." With valuations at high levels, "any disappointment in the outlook for the bottom line can significantly impact stock market performance," Torres adds.
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Election jitters also weighed on equities Wednesday, as "red sweep talk is occurring all over Wall Street and Washington," the economist writes. According to IBKR ForecastTrader, the GOP is projected to win the Senate. Democrats maintaining control of the House flipped from a modest chance of 45% to a probable outcome of 52%.
Housing data disappoints
Wednesday's economic data also did no favors for equities, as one print on the housing market came close to its lowest level in 14 years. Existing home sales decreased 1% in September to a seasonally adjusted annual rate of 3.84 million, according to the National Association of Realtors. On a year-over-year basis, sales decreased 3.5%.
"So what's the problem? First of all, there still are not enough options out there," writes BMO Capital Markets Senior Economist Jennifer Lee. "Second, it's affordability. Median prices may be down 5.2% from the highs in June, but they're still up 3% year over year."
Interactive Brokers' Torres notes that many prospective buyers are waiting for interest rates to fall following the Federal Reserve's jumbo-sized rate cut last month. "Nonetheless, borrowing costs have climbed following the central bank's actions," the economist says.
"Sales offices were excited after the adjustment by the Fed, as they all called their potential buyers, yelling that mortgages will soon be below 6%, bringing their monthly payments in line with their budget situation," Torres writes. "They thought 30-year mortgages would go from 6.1% to 5.6%, serving to propel affordability north, but their smiles have turned upside down, with the gauge now sporting a 7-handle."
At the closing bell, the blue chip Dow Jones Industrial Average was down 1% to 42,514, while the broader S&P 500 declined 0.9% to 5,797. The tech-heavy Nasdaq Composite shed 1.6% to end at 18,276.
Stocks on the move
Starbucks (SBUX) stock ended 0.9% higher but gapped down as much as 2.4% soon after the open after the global coffee retailer announced preliminary financial results for its fourth quarter, which came in well below analysts' expectations. The company also said it will suspend giving financial guidance for fiscal 2025.
"Despite our heightened investments, we were unable to change the trajectory of our traffic decline, resulting in pressures in both our top line and bottom line," Starbucks Chief Financial Officer Rachel Ruggeri said in a statement. "We are developing a plan to turn around our business, but it will take time."
In brighter news, Starbucks also announced a 7% hike to its quarterly dividend to 61 cents per share. Starbucks has raised its dividend annually for 14 consecutive years.
Coca-Cola (KO) stock declined 2.1% despite beating top- and bottom-line expectations for its third quarter. The global beverage company also revised its full-year organic revenue growth forecast, now pointing towards the higher end of its previously estimated range.
As a result of its performance in the first nine months of the year, Coca-Cola said it now anticipates organic revenue growth of approximately 10% in fiscal 2024, which is the high end of its prior range of 9% to 10%. It added that it continues to anticipate earnings-per-share growth in the range of 5% to 6%.
KO, which is one of Warren Buffett's favorite stocks, is trailing the broader market by about 4 percentage points so far this year, but analysts are bullish on the name. Analysts surveyed by S&P Global Market Intelligence assign KO stock a consensus recommendation of Buy, with fairly high conviction to boot.
McDonald's (MCD) stock tumbled 5.1% after the Centers for Disease Control and Prevention (CDC) announced it was investigating an E. coli outbreak linked to McDonald's Quarter Pounder hamburgers.
MCD, which is among the best stocks for reliable and rising dividends, was the worst performer among all 30 Dow Jones stocks on Wednesday, but analysts said the selloff could be overdone.
"Although we are not discounting the risk to guest perception/food safety concerns, we believe the near-term impact could prove less dire than that of prior outbreaks elsewhere in the industry," writes Jefferies analyst Andy Barish, who rates MCD at Buy.
Barish adds that he's waiting for additional commentary to see whether McDonald's near-term financial estimates will need to be adjusted.
Analysts were still updating their models on Wednesday, but as of market close, Wall Street remained mostly bullish on the stock. Of the 37 analysts issuing opinions on MCD surveyed by S&P Global Market Intelligence, 16 rated it at Strong Buy, six said Buy, 14 called it a Hold and one had it at Sell. That equates to a consensus recommendation of Buy with mixed conviction.
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