Opening Market Update

Published as of: October 22, 2024, 9:10 a.m. ET

(Tuesday market open) A round of solid earnings results got overshadowed early Tuesday by rising Treasury yields. Major indexes pulled back for the second straight day in response, with tech shares slipping after yesterday's chip-driven rally.

The benchmark 10-year Treasury note yield added to Monday's gains this morning, reaching new three-month highs. The rally mainly reflects U.S. economic optimism, rather than worries about inflation reaccelerating.

Even so, market participants have sliced chances of two more rate cuts this year to just 67% from 85% a week ago, futures trading indicates. Odds remain very solid for a 25-basis point cut by the Federal Reserve in November, but a December meeting pause seems like more of a possibility.

That said, inflation and jobs data next week could ultimately factor into the Fed's thinking.

"Why are Treasury yields rising? Stronger economic growth than expected and reassessment of the magnitude of Fed rate cuts," said Kathy Jones, chief fixed income strategist at Schwab. "The last employment report was a big turning point."

The September nonfarm payrolls report showed more than 250,000 jobs created when analysts had expected less than 150,000. The next one is due a week from this Friday.

Away from rates, focus is firmly on earnings with mostly solid results this morning from major firms like General Motors (GM), 3M (MMM), Lockheed Martin (LMT), and Verizon (VZ). Financial sector earnings last week generally impressed, but this week features a larger sweep of sectors. Industrials are widely represented and may have a low bar to clear with analysts expecting poor earnings from the sector.

More than 20%, or 112, S&P 500^® (SPX) names report this week, including Boeing (BA) and Tesla (TSLA). Of the 14% of S&P 500 companies already posting third-quarter results, 79% have beaten earnings per share (EPS) expectations, according to FactSet.

In premarket trading, futures based on the SPX dropped 0.5%, and the Nasdaq 100^® (NDX) slipped 0.6%. Futures based on the Dow Jones Industrial Average^® ($DJI) fell 0.4%.

• The 10-year U.S. Treasury yield (TNX) inched higher to 4.19%.
• The U.S. Dollar Index ($DXY) rose to 103.98 and remains near two-month highs.
• The Cboe Volatility Index^® (VIX) rose to 19.2.
• WTI Crude Oil (/CL) climbed 0.8% to $71.13 per barrel.
• Bitcoin (BTC) fell 0.8% to $67,077.

The 10-year note yield topped 4.2% briefly this morning for the first time since July 26. Rising yields raise borrowing costs for companies and consumers, generally negative for the market. The U.S. dollar also padded recent gains this morning and can hurt overseas sales for U.S. companies with major business abroad.

"The U.S. dollar is up by 3.5% in the past four weeks, the strongest gain since October 2022," noted Kevin Gordon, director, senior investment strategist at Schwab.

As yields rise, chances for steep Fed rate cuts decline. The futures market now estimates the fed funds rate next March at 4.04%, up from 3.41% a month ago. That's the equivalent of removing two 25-basis point rate trims between now and March.

Housing numbers dominate this week's data, including September existing home sales and September new home sales data on Wednesday and Thursday, respectively.

Existing home sales consensus stands at a seasonally adjusted annual rate of 3.9 million, according to Briefing.com. That's barely changed from 3.86 million in August. Mortgage rates dipped in September, potentially loosening the market, but stormed back in October as Treasury yields rose and investors pulled back expectations for the number of potential Federal Reserve rate cuts.

Thursday's flash global Purchasing Managers' Index^™ data might get as close a look as any numbers on tap this week, especially with European and Asian economies struggling and the U.S. manufacturing sector still soft. That day also brings weekly U.S. initial jobless claims, which fell more than expected last week but were elevated for the second week in a row.

Stay tuned early tomorrow for weekly U.S. mortgage applications, which sank dramatically last time out with rates back on the rise.

Good earnings have been rewarded by investors more than usual so far this reporting season, and General Motors shares received applause from investors in pre-market trading after its earnings today. It easily beat analysts' quarterly earnings and revenue expectations and raised its full year forecast despite struggles in China. Quarterly vehicle deliveries fell 2% from a year earlier but retail sales rose 2%, GM said, with pickups and full-size SUVs driving the biggest gains. EV sales rose 60% from a year earlier. Shares climbed 1% ahead of the open.

Lockheed Martin earnings were more of a mixed bag, with the company exceeding analysts' EPS forecasts but coming up short on revenue. For the full year, however, Lockheed still expects sales in line with Wall Street's thinking, and as the company points out, government funding and timing kept some F-35 sales from being included in today's report. The company delivered 48 F-35s during the quarter and increased missile production programs. The F-35 deliveries were a key development after none were delivered in the first half. Still, shares fell in pre-market trading with the stock up by leaps and bounds over the last few months.

After the close today, Texas Instruments (TXN) provides a look at the semiconductor business after shares leveled off over the last few months. The company beat analysts' expectations last time it reported, helped by stabilizing demand for the types of chips used in personal electronics, Reuters reported. Lower manufacturing costs helped, too, but what investors likely want to see this time around is continued signs of improvement in the phone and personal computing markets where TXN plays a big role.

Elsewhere in the chip arena, shares of Nvidia (NVDA) catapulted to new all-time highs yesterday as investors awaited results this week and next from Tesla (TSLA) and other mega caps known to be ferocious buyers of AI chips. Last week's strong Taiwan Semiconductor Manufacturing (TSM) results and guidance suggested demand for these chips remains hefty. Even so, the seven mega caps taken together haven't recorded a new high since mid-July. Meanwhile, the S&P 500 Equal Weight index (SPXEW) has made 18 new all-time highs. This speaks to the broadening of the rally beyond big tech.

Tesla reports Wednesday following the close and is arguably the key earnings report of the week. Shares slipped this month after third-quarter deliveries slightly missed expectations. When Tesla reported in July, earnings fell short of analysts' expectations, hurting shares.

Other earnings ahead include a wide assortment but with a manufacturing focus. Honeywell (HON), AT&T (T), IBM (IBM), Coca-Cola (KO), Northrop Grumman (NOC), Boeing, Whirlpool (WHR), and others are on the list. Industrial production for September was the latest soft manufacturing data, so it could be noteworthy to hear what executives say about the industrial climate.

Stocks on the move:

• Verizon fell nearly 3% in a negative reaction to earnings posted this morning. Subscriber growth was above analysts' expectations but quarterly revenue came up shy of Wall Street's forecast. Verizon called third quarter results "strong" and says it's on track to meet full-year 2024 financial guidance.
• Philip Morris (PM) climbed 2.5% in pre-market trading after the cigarette maker surpassed Wall Street's earnings outlook and raised its forecast. Smoke-free revenue climbed 17% during the quarter and is increasingly contributing to the company's growth.
• 3M climbed 5% in pre-market trading after an earnings beat. The company also raised the lower end of its full year adjusted profits forecast, helped by strong demand for electronics used in vehicles and phones and industrial products, Reuters reported.

Monday in review: Stocks stumbled to start the week, pausing the long rally amid mounting pressure from rising Treasury yields and strength in the dollar. Still, the tech sector kept its head above water, bolstered by chip optimism, and major indexes finished well off their lows. The benchmark 10-year Treasury note (TNX:CGI) yield posted nearly three-month highs.

Talking technicals: The 20-day simple moving average for the SPX, now near 5,774, could represent support below the market. It acted as a support area on a test earlier this month.

Weekly roundup: Check all the key elements to watch over the next few days in Schwab's Weekly Market Outlook hosted by Jeffrey Kleintop, chief global investment strategist at Schwab.

Early today, futures traders built in an 88% chance rates will fall 25 basis points at the Federal Open Market Committee (FOMC) meeting on November 6–7, based on the CME FedWatch Tool. There's a 12% chance of no cut at that meeting.

Ideas to mull as you trade or invest

Blue ribbons: This earnings season, investors apparently have less patience with underperforming firms, possibly because the bar has been set so low for many companies' results. Firms falling short on EPS to date have performed almost 4% worse than the SPX on the days of their reports, Bloomberg data shows, a worse outcome than usual. This could reflect ideas that with the forward price-to-earnings (P/E) ratio for the SPX at around 22, companies are expected to perform well and deliver strong guidance. Otherwise, they could get dinged. Investors have priced in earnings strength and exit quickly on disappointing results. The opposite is also true, to some extent. Companies exceeding earnings expectations are outpacing the SPX by more than the usual amount.

Early bird special: Last week it was ASML. Two years ago, SoFi Technologies (SOFI) fell victim. They mistakenly reported earnings too early. Better five hours too early than a minute too late, the saying goes, but that's more appropriate for weddings and taking the SAT, not earnings reports. ASML and SoFi each issued their reports earlier than scheduled due to technical or human error. In the long run, an early report doesn't necessarily change things. ASML shares would have likely fallen even if the company had reported last Wednesday, as scheduled, rather than last Tuesday. The numbers would have disappointed either way. There does seem to be more of this lately, however, meaning investors should stay on their toes during earnings season just in case.

Dotting i's, crossing t's: Getting things right in earnings reports is also key. Finance, investor relations, and public affairs departments at public companies huddle for weeks to make sure every little number is accurate, but sometimes errors get overlooked. Lyft (LYFT) was sued by shareholders for securities fraud after a mistake in its earnings release last February that sent the stock soaring and then plunging, Reuters noted. Lyft's release said one of its profit margins would expand by 500 basis points, rather than 50, an error it had to correct. This highlights another reason why it can be a good strategy for investors and traders to wait before immediately trading an earnings report. The company's earnings call, usually soon after the results get released, often provides far more context, even when all the numbers are correct.

October 23: September existing home sales and expected earnings from AT&T (T), Boeing (BA), IBM (IBM), T-Mobile US (TMUS), Tesla (TSLA), Whirlpool (WHR), Coca-Cola (KO), and Hilton (HLT).

October 24: September new home sales and expected earnings from American Airlines (AAL), Dow (DOW), Honeywell (HON), Northrop Grumman (NOC), Union Pacific (UNP), and Southwest Air (LUV).

October 25: September durable goods orders, University of Michigan Consumer Sentiment—final, and expected earnings from Aon (AON), Colgate-Palmolive (CL), Sanofi (SNY), and HCA (HCA).

October 28: Expected earnings from Ford (F) and Waste Management (WM).

October 29: October consumer confidence from the Conference Board and expected earnings from D.R. Horton (DHI), McDonald's (MCD), Pfizer (PFE), Alphabet (GOOGL), Chipotle (CMG), and Visa (V).