Betting on earnings — Now corporate America has to deliver

This week is the 14^th annual Headstrong Project (theheadstrongproject.org) Gala in NYC. We hope to raise more than $6 million to treat our veterans that suffer from the hidden wounds of war – PTSD.

This year’s theme is “The Promises We Keep.”

Stocks advanced on Friday as investors decided that a strong earnings season could keep this party going—even as oil remains elevated, borrowing costs are high and consumers sentiment continues to get uglier and uglier. Friday’s sentiment number came in at 46.3 – below the already weak estimate of 47.6. The report also showed views of current economic conditions hitting an all-time low.

But buyers stepped in, most S&P names advanced, leaving us within striking distance of its closing record at 7,818.

Recall, the broader market has been under pressure…more than 50% of the S&P companies were trading below their long term trendlines – putting many of them in their correction zone… (down more than 10%) while some were even in the bear market zone (down more than 20%) …So, while it appears as if the S&P had only backed off by 3% (the Aug/Sept drawdown), the Equal Weight S&P (which gives every company the same influence) had declined by nearly 7% (Aug – early October drawdown).

And what that means – is there are a fair number of names that have been repriced offering opportunities for longer term buyers…..and as long as their investment thesis remains intact – then the lower price deserves a look.

At the end of the day—the Dow gained 423 pts, or 0.8%, the S&P added 46 pts, or 0.6%, the Nasdaq gained 173 pts, or 0.6%, while the Russell added 13 pts, or 0.5%, the Transports lost 5 points or 0.02%, the Equal Weight S&P gained 45 pts or 0.5% while the Mag 7 added 336 pts or 0.9%.

For the week, the Dow, S&P, Nasdaq, Equal Weight and Mag 7 indexes all gained, while the Russell and Transports lost ground.

Of the 11 S&P sectors – Energy lost 0.25% while Communications lost 1.5%. Leaving us to ask - what happened to Communications – Telecom stocks – think the wireless carriers - got crushed after SpaceX announced Thursday that it had agreed to buy Grain Management’s nationwide 800 MHz spectrum licenses for a reported $8 billion.

OK – so what? Well, strap in – because Elon is about to disrupt the wireless/telecom industry (and we can see how this is gonna play out…..!) The purchase will help build Starlink Mobile into a nationwide competitor by combining ground-based coverage with his satellites to create another nationwide wireless competitor…

Now, before anyone goes screaming about Musk, this deal STILL needs FCC approval, and building the network will take time and money, but investors weren’t waiting around – they sold the wireless names – sending AT&T, -10%, Verizon down 9% and T-Mobile down 13% and they bought SPCX up 1.7% to close at $167.57 and tower stocks rallied – AMT +9.3% and CCI +15% because the ground network needs infrastructure to operate….and so UP they went.

Other sectors that found all kinds of love – Disruptive Tech +2.5%, Cyber up 3.6%, Software up 2.8%, Aerospace & Defense + 0.9%, Quantum names + 0.8%, Memory names + 0.5%, Metals & Miners up 1.7%, Big Pharma + 1.2%.

Chipmakers were weak- the SOXX lost 0.7% as questions about AI revenue and financing continued to hang over the group and with earnings just around the corner investors want evidence that the spending will produce the expected returns.

ASML (the Dutch giant) reports on 10/14, AMD reports 11/3, INTC 10/29, AVGO 12/11, NVDA 11/19, KLA 10/28, MRVL 12/2…..

Meanwhile, the bond market continues to demand attention.

Both the TLT and TLH ended the day higher – up 0.15% and 0.1% respectively. The 2-year Treasury yield ended Friday at 4.80%, up 5 bps, the 10-year rose 2 bps to 5.24%, while the 30-year stood at 5.60%. This morning treasuries are flat because the bond market is closed (it’s Columbus Day).

And oil isn’t helping either. WTI rose 36 cts on Friday to settle at $91.85, while Brent added 44 cts to end at $104.72. Optimism about a diplomatic solution with Iran and the prospect of more Russian diesel reaching global markets did offer some potential relief but then renewed supply concern hit markets as US producers shut production ahead of Hurricane Isaias halting (temporarily) 1.5 million bpd.

Then came the weekend. Renewed attacks on Saudi Arabia’s King Khalid International Airport in Riyadh - claimed by the Iranian-backed Houthis - caused casualties and disrupted air travel. That only adds another layer of uncertainty as we head into the new trading week – think potential retaliation, transportation disruptions and the threat to energy infrastructure…all reasons for traders and the markets to remain cautious about supply.

For markets, the question is whether this escalation threatens production or the supply of oil. This morning oil is trading down 50 cts at $91.39 and remains in the $87.60/$100 trading range and at these prices – do not expect to get any relief at the pump yet. This morning – we are learning that there is a supposed agreement between Russia and Ukraine on an energy ceasefire and a Russian diesel agreement. …that headline is still developing…. Zelensky says ‘that’s news to me!’ Trump says ‘its time for Zelensky to go’…. Oh boy……

Gold found buyers on Friday, rising about 1.5% or $60 to $4,193/oz. The move appeared to be a direct result of Russia agreeing to release more diesel to help ease the global supply issue. And do not forget - Gold – like many stocks is down more than 20% off its high - putting it in a true bear market – it seems to have found support at $4,000 and so I think the buying in Gold (like stocks) was ‘opportunistic’…. This morning – gold is trading down $18 at $4,176. Trendline resistance is $4,259 – while support remains at $4000.

Ok – so officially – we are about to kick off earnings season on Tuesday – Now, the S&P has delivered seven consecutive quarters of double-digit earnings growth, and analysts expect third-quarter profits to rise roughly 25% from a year ago. Think about that for one minute……Companies have continued to grow profits DESPITE all kinds of geopolitical uncertainty, rising energy costs and rising rates…. and while that gives investors a reason to remain optimistic, it also sets a high bar and maybe some unrealistic expectations.

Because when expectations are this strong, a good quarter may already be priced in. Investors will want to hear MORE…..they want to know that demand remains healthy, margins are holding up and management sees continued robust growth ahead. Beat on earnings and revenue, hold the margins and raise the outlook—and the rally has a better chance of continuing.…but beat the number and disappoint on anything else and watch how quickly the buying becomes selling…. causing this celebration to end.

Recall what happened to Samsung last week – they crushed it on every metric – profits rose 9 x’s and still that was not enough…. The stock is down 10% in 3 days.

The fun starts with the big banks - JPM, GS, C and WFC leading the charge, followed by BAC MS on Wednesday. And their trading desks are expected to have plenty to celebrate. Estimates for just sales & trading are high…..But remember - A busy trading desk tells you something about market activity, but it doesn’t tell you anything about the economy.

Listen to what they are saying about loan demand, deposit costs, net interest income (expected to be up significantly), credit quality and the consumer? What are they saying about the ‘loan loss reserve’ acct – because that tells you what they really think about the consumer and corporate debt.

Remember – today is Columbus Day – banks and the bond market are closed…. Stocks will trade. Tuesday brings Existing Home Sales alongside the bank earnings kickoff. Wednesday brings CPI and the FED’s Beige Book. Thursday delivers PPI, Retail Sales, jobless claims and the Empire State and Philadelphia FED manufacturing surveys. Friday brings import prices and industrial production.

Current expectations call for headline CPI to rise 0.6% m/m and 3.6% y/y, PPI to rise 0.6% m/m and 5.4% y/y – both a teeny tiny bit higher, these numbers will leave plenty for the bond market to chew on. Hotter numbers could push yields higher and make life more difficult for stocks. Softer readings could give investors some breathing room—especially if earnings and guidance remain strong.

European markets are up, Spain up 0.8%, while the Euro Stoxx is up 0.4%. Everyone else is in between. Earnings begin there as well…..LVMH and ASML are two of the bigger names to report..

US futures are mixed…Dow futures up 36, S&P’s up 10, the Nasdaq is down 20 while the Russell is up 2 pts. Again, expect it to be a slow day – the bond market is closed and the banks are closed…a lot of people taking the long weekend off.

The S&P closed at 7,811 – up 46 pts. leaving us just 7 pts away from the all-time closing high. Conversely, the Equal Weight S&P is 378 pts or 4.3% away from retaking its all-time high…Right now – futures are suggesting a relatively quiet day and that makes sense – how the rest of the week turns out – well that’s another story.

Cavatappi with pureed butternut squash and toasted walnuts

This is easy fall dish and is great as a first course dinner party you are going to throw.  It presents beautifully on the plate and would be an unexpected surprise to your guests.

Prep time: 15m

Cook time: 40m

Total time: 55m

Serves: 2-4

Ingredients

1/2 lb Cavatappi

3 Garlic Cloves - whole

2 packagaes Peeled and cubed Butternut Squash

1/2c Lite Cream

1c chicken (or vegetable) stock

1 `large onion - diced

1 med shallot - diced

1/2 c crushed toasted walnuts, fresh grated parmegiana, olive oil, butter, dried sage.

Preparation

Step 1

Place the butternut squash in a baking dish and season with S&P, fresh garlic and dried sage - toss with oil and a dollop of butter.  Do not drown in oil - just enough to coat the squash. 

Step 2

Roast in the oven on 375 degrees - making sure to turn at least once - this part should take about 35 mins.... but use a fork to test the doneness of the squash. 

Step 3

While this is roasting – bring a pot of salted water to a rolling boil then turn heat down to med to keep it ready.

Step 4

In a separate pan – sauté one lg onion and one med shallot in olive oil.

Step 5

When the squash is cooked - puree it in the food processor with the sautéed onion and shallot, add ½ cup of lite cream and 1 cup of warmed chicken stock.

Step 6

Puree and taste - season with a bit more s&p if you need to.  

Step 7

 Add pasta to the pot and cook until aldente - 8/10 mins.... Strain pasta - always reserving a mugful of the pasta water.

Step 8

Return to the pot and add the butternut squash sauce.  Toss, add grated parmegiana and toasted walnuts and toss again. Here is where you might need to add a bit of the reserved pasta water to keep it moist and delicious.

Step 9

Serve immediately in warmed bowls.