Stocks Supported by Government Reopening Optimism and Chip Stock Strength

US stock indexes are mostly higher, with the S&P 500 reaching a 1-week high and the Dow an all-time high, primarily driven by anticipation of an imminent government shutdown resolution and robust performance in semiconductor stocks like AMD (+7%) and GlobalFoundries (+5%). This positive momentum is partially offset by weakness in Magnificent Seven technology stocks, which are weighing on the Nasdaq 100. Q3 corporate earnings have significantly outperformed, with 82% of S&P 500 companies exceeding forecasts and earnings up 14.6% year-over-year, while markets are pricing in a 65% chance of a 25bp Fed rate cut by December. Treasury yields edged lower as safe-haven demand for government debt eased amid the prospect of a government reopening.

Analysis

US equity markets are largely positive, with the S&P 500 reaching a 1-week high and the Dow Jones Industrials an all-time high, primarily driven by anticipation of an imminent US government shutdown resolution. This momentum is bolstered by strong performance in semiconductor stocks, such as AMD's +7% jump on sales growth projections and GlobalFoundries' +5% rise post-Q3 earnings beat. Conversely, the Nasdaq 100 is experiencing weakness, weighed down by several Magnificent Seven technology stocks.

The Q3 corporate earnings season is concluding robustly, with 82% of S&P 500 companies exceeding forecasts, leading to a substantial 14.6% year-over-year earnings growth, significantly surpassing initial expectations. This marks the best quarterly performance since 2021. Economic data showed US MBA mortgage applications up +0.6%, primarily from a +5.8% rise in purchase applications, despite a slight increase in the 30-year fixed mortgage rate to 6.34%.

Monetary policy expectations are shifting, with markets pricing a 65% chance of a 25 basis point rate cut at the December FOMC meeting. This, combined with strengthening equities and reduced safe-haven demand from the government reopening, is pressuring Treasury yields, with the 10-year T-note yield declining to 4.085%. However, upcoming Treasury auctions, including a $42 billion 10-year T-note sale, introduce supply-side considerations.

Key Decisions for Investors

• Monitor the final outcome and fiscal implications of the US government shutdown resolution, as it remains a key near-term market catalyst.
• Evaluate sector-specific opportunities in semiconductors, driven by strong company fundamentals and growth outlooks, while assessing potential rotation risks from underperforming large-cap technology stocks.
• Factor in the robust Q3 corporate earnings as a positive fundamental backdrop, but remain attentive to the market's increasing expectation of a December Fed rate cut and its potential impact on interest rate-sensitive assets and broader valuations.