Stocks started the week on a down note as rising tensions in the Middle East sapped appetite for risk assets ahead of a heavy week of corporate earnings reports and economic news.
Markets on Monday were still digesting last week's blowout September jobs report, which was at odds with other recent data suggesting weakness in the labor market. Experts say the reading supports the idea that the economy is headed for an elusive soft landing. Either way, the stronger-than-expected jobs outlook has market participants rethinking the odds of a cut to the short-term federal funds rate at the next Fed meeting.
After last month's surprise jumbo-sized cut of 50 basis points (bps), or 0.5%, markets are trying to forecast the Federal Open Market Committee's (FOMC) next move. As of October 7, futures traders assigned an 85% probability to the central bank lowering rates by a quarter of a percentage point (25 bps) in November, up from 65% one week ago, according to CME Group's FedWatch Tool. Odds of a 50 bps cut fell to 0% from 35%, while traders put a 15% chance on the Fed standing pat, up from 0% last week.
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This week's busy economic calendar also helped keep a lid on equities on Monday. After all, there are a number of potentially market-moving events on the horizon, including the next Consumer Price Index (CPI) report.
"Following the blowout jobs report last Friday, we believe the importance of CPI this week has risen," writes Ohsung Kwon, equity and quant strategist at BofA Securities. "While stocks should be able to withstand a slight upside surprise in inflation given improving macro data, a sizable surprise could bring uncertainty on the easing cycle and more volatility into the market."
The strategist adds that although good news on the economic front is once again good news for stocks, that will only be the case as long as inflation doesn't pick up again.
"The data flow makes this week's inflation data more interesting," Kwon notes. "We expect a firm core CPI print, which could lead to a further reduction in pricing for cuts. A slew of Fed speakers will also have the option to react to the latest strong data and provide guidance on the next move."
At the closing bell, the blue chip Dow Jones Industrial Average fell 0.9% to 41,954, while the broader S&P 500 lost almost 1% to 5,695. The tech-heavy Nasdaq Composite declined 1.2% to 17,923.
Earnings season looms
The earnings calendar heats up this week with several of the nation's biggest banks and financial institutions slated to report. In addition to JPMorgan Chase (JPM) (a Buy-rated Dow Jones stock), Wells Fargo (WFC), Bank of New York Mellon (BNY), Progressive (PGR) and BlackRock (BLK) will focus the market's attention on the financial sector.
Indeed, nearly half of the S&P 500 companies scheduled to report earnings over the next two weeks hail from the financial sector, notes John Butters, senior earnings analyst at FactSet.
"The financial sector is predicted to report a year-over-year earnings decline of -0.4% for the third quarter," Butters writes. "At the industry level, banks are the only industry in the sector that is expected to report a year-over-year decline in earnings at -12%. Banks are also expected to be the largest contributor to the year-over-year earnings decline for the sector. If banks were excluded, the estimated earnings growth rate for the financial sector would improve to 6.9% from -0.4%."
Other notable names scheduled to release quarterly results include Pepsico (PEP), Delta Air Lines (DAL) and Domino’s Pizza (DPZ).
Apple bitten by downgrade
Apple (AAPL) lost 2.3% Monday, shedding $78 billion in market cap in the process, hurt by a downgrade to Hold from Buy at Jefferies. Analyst Edison Lee cited some overly optimistic expectations on iPhones sales and AI-capable smartphones as reasons for the ratings change.
"Near-term expectations for iPhone 16 and even 17 are too high," Lee writes in a note to clients. "A lack of material new features and limited AI coverage means high market expectations (5% to 10% unit growth) are unlikely to be met. Our analysis suggests weaker-than-expected initial demand."
Furthermore, Lee adds that AI-capable smartphone tech is likely two to three years away. "Unlike AI servers, smartphones lack high-speed memory and advanced packaging tech that allow fast data transfer between AP and memory, thus limiting their AI capabilities," writes Lee. "Smartphone hardware needs rework before being capable of serious AI."
Despite the downgrade, Apple remains one of analysts' top S&P 500 stocks to buy, as well as a highly rated component of the Dow. Long-term shareholders know that Apple has been an outstanding buy-and-hold bet. Anyone who put $1,000 into Apple stock 20 years ago has absolutely clobbered the market.
As for the shorter-term outlook, Wall Street maintains its collective bullishness on the name, assigning it a consensus recommendation of Buy, and with high conviction to boot, according to data from S&P Global Market Intelligence.
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