Stocks See Support From M&A and AI Optimism

US equities traded mixed, supported by AI optimism, exemplified by Amazon's $38 billion AWS deal with OpenAI, and robust Q3 earnings beat rates, but pressured by rising 10-year Treasury yields and a weak October ISM manufacturing report. Significant M&A news included Kimberly-Clark's nearly $50 billion acquisition of Kenvue and Eaton's $9.5 billion purchase of Boyd's thermal business. Federal Reserve commentary presented a mixed picture, with Governor Miran suggesting current policy is too restrictive while President Goolsbee remained cautious on inflation, as markets anticipate a 66% probability of a December rate cut.

Analysis

US equities exhibited mixed performance today, with the Nasdaq 100 gaining +0.33% driven by continued AI optimism, notably Amazon's $38 billion AWS deal with OpenAI, while the Dow Jones Industrials declined -0.43% amid a +3.1 basis point rise in the 10-year T-note yield. Significant M&A activity included Kimberly-Clark's nearly $50 billion acquisition of Kenvue, which saw Kenvue surge over +16% and Kimberly-Clark fall more than -12%.

Federal Reserve commentary presented a bifurcated outlook, with Governor Miran suggesting current policy is "too restrictive," contrasting with Chicago Fed President Goolsbee's ongoing concern about inflation. Markets are pricing in a 66% chance of a 25 basis point rate cut at the December FOMC meeting. Economic data was also mixed, as the October ISM manufacturing index fell to 48.7, below expectations, though the ISM prices paid index declined significantly by -3.9 points, and the S&P US manufacturing PMI was revised slightly higher to 52.5.

Corporate earnings season continues robustly, with 80% of S&P 500 companies beating forecasts, marking the best quarter since 2021. However, this strong beat rate is tempered by projected slowing growth, with Q3 profits expected to rise +7.2% year-over-year (smallest in two years) and sales growth slowing to +5.9%. The ongoing US government shutdown, now in its sixth week, and the impending Supreme Court ruling on reciprocal tariffs, which could necessitate over $80 billion in refunds, introduce considerable macro uncertainty.

Key Decisions for Investors

• Monitor Federal Reserve communications closely for clarity on future rate policy, given the divergent views and high market expectation for a December cut.
• Assess M&A-driven opportunities and risks, recognizing the immediate positive impact on acquired entities like Kenvue and potential short-term pressure on acquirers such as Kimberly-Clark.
• Maintain strategic exposure to AI-driven growth sectors, as evidenced by significant cloud computing deals, while carefully evaluating individual company valuations.
• Account for increasing macro uncertainty stemming from the protracted government shutdown and the Supreme Court's impending tariff ruling, which could introduce fiscal liabilities and policy shifts.
• Adopt a selective approach to equities, acknowledging strong Q3 earnings beats but also the decelerating profit and sales growth trends that may temper future performance.