S&P 500 set to snap eight session run of record closes, amid profit-taking, inflation worries

The S&P 500 looks likely to snap a historic run higher on Tuesday. On Monday, the index posted a record closing high for an eighth consecutive session above 4700, but ahead of the Tuesday close the index is trading around 0.4% lower, having fallen back to the 4670s. Similarly, the Nasdaq 100 index is 0.7% lower and the Dow is 0.5% lower.

The Q3 earnings season, which has been one of the main drivers of the impressive rally across US equity markets from the September lows, is now drawing to a close. According to Refinitiv data cited by Reuters, 81% of the 445 S&P 500 to have reported earnings so far have beaten analyst expectations. As a result, traders said some profit-taking was inevitable, with one saying that “it's not a run for the exit, but I just don’t see a reason to add exposure now”.

Some analysts cited the October Producer Price Inflation (PPI) report, released prior to the US market open, as another reason for the cautious tone to trade. The YoY rate of PPI remained elevated at 8.6% in October, in line with expectations. That suggests the US October Consumer Price Inflation report, set for release at 1330GMT on Wednesday, is likely to also show persistently elevated price pressures. One risk to equity markets is that US price pressures remain elevated for longer than the Fed expects, or indeed worsen in the month ahead, which may force the Fed into raising interest rates earlier than currently expected. If the Fed is forced to raise interest rates before the labour market has fully recovered to pre-pandemic health, this could weigh on economic growth.

Tesla shares were down a further 10% on Tuesday, exerting a further drag on the S&P 500 and Nasdaq 100 indices, following Monday’s 4.8% decline. Over the weekend, Tesla CEO Elon Musk proposed selling 10% of his TSLA holdings in a Twitter poll, with the end result of the poll showing 57.9% in favour of the sale. Equity analysts said the underlying fundamentals that had underpinned the staggering rally in TSLA shares in recent years remain and that any downside as a result of the stock sale would be relatively short-lived amid strong investor demand to scoop up the available shares.