Stocks Supported by Strong Q3 Earnings Results

Equity markets advanced today, propelled by better-than-expected Q3 earnings from major firms like ASML, Morgan Stanley, and Bank of America, alongside dovish remarks from Boston Fed President Susan Collins that reinforced expectations for a 25 basis point rate cut at the next FOMC meeting. This positive sentiment, supported by a strong Oct Empire manufacturing survey, drove the 10-year T-note yield to a four-week low. Concurrently, escalating US-China trade tensions and the ongoing US government shutdown spurred safe-haven demand, pushing gold to a new all-time high and further compressing global bond yields, though concerns remain regarding projected slower Q3 corporate profit and sales growth despite high earnings beat rates.

Analysis

Equity markets experienced broad gains today, with the S&P 500, Dow Jones, and Nasdaq 100 advancing +0.73%, +0.64%, and +0.81% respectively, primarily driven by stronger-than-expected Q3 earnings. Notable contributions came from ASML Holding, up over +4% on new orders, and financial institutions Morgan Stanley and Bank of America, both rising more than +4-6% following solid Q3 results. This positive sentiment was reinforced by the Oct Empire manufacturing survey, which significantly beat expectations by rising +19.4 to 10.7.

Dovish remarks from Boston Fed President Susan Collins, suggesting further rate cuts this year to support the labor market, have solidified market expectations for a -25 bp rate cut at the upcoming October 28-29 FOMC meeting, with a 98% probability priced in. This, combined with safe-haven demand, pushed the 10-year T-note yield to a 4-week low of 3.998% and the German bund yield to a 3.25-month low of 2.574%. Falling inflation expectations, evidenced by the 10-year breakeven rate hitting a 3.25-month low of 2.293%, also provided support for T-notes.

Despite 71% of reporting S&P 500 companies beating forecasts, overall Q3 corporate profit growth is projected at a modest +7.2% year-over-year, marking the smallest increase in two years, while sales growth is expected to slow to +5.9%. The ongoing US government shutdown introduces significant economic uncertainty, delaying key reports and potentially increasing jobless claims to 4.7% if prolonged, which could further dampen consumer spending. Escalating US-China trade tensions also persist, driving safe-haven flows into gold, which reached a new all-time high.

Key Decisions for Investors

• Monitor upcoming Q3 earnings reports closely for sustained corporate profitability and sales growth, particularly given the projected slowdown in overall growth despite high beat rates.
• Factor in the high probability of a Fed rate cut, which could continue to support equity valuations, but remain vigilant for any shifts in Fed rhetoric or economic data that might alter this outlook.
• Consider the implications of the ongoing US government shutdown and US-China trade tensions, which could introduce volatility and drive further safe-haven demand, potentially impacting bond and commodity markets.