Investors face a packed week of Federal Reserve signals, early third-quarter earnings and fresh economic data as stocks try to hold on to a strong year despite a sharp climb in long-term borrowing costs.
The yield on the 10-year Treasury note hit 5.34% on Thursday, Oct. 1, its highest level in 24 years, Reuters reported. Investors have demanded higher yields amid expectations of solid economic growth, energy-driven inflation and a wave of corporate borrowing to finance artificial intelligence projects, according to Reuters. Higher yields raise borrowing costs across the economy and make bonds a stronger competitor to stocks.
“The interest rate story is the biggest headwind,” Chuck Carlson, CEO of Horizon Investment Services, told Reuters.
Yields dipped Friday right after the government reported that employers added just 29,000 jobs in September, a weaker-than-expected figure that lowered the odds of another Fed rate increase this month. They turned higher later in the session, with the 10-year yield at about 5.28% late in the day, CNBC reported.
Fed minutes take center stage
On Wednesday, the Fed will publish minutes from its Sept. 15-16 meeting, where policymakers voted unanimously to raise their benchmark rate by a quarter percentage point, to a range of 3.75% to 4%. It was the central bank’s first increase in three years. Investors will look for how officials weighed persistent inflation against a cooling job market and for any hints about whether another hike could come in October or December.
Late Friday, traders saw about a 77% chance that the Fed leaves rates unchanged at its Oct. 27-28 meeting, based on CME Group’s FedWatch tool, though they still saw a high likelihood of a hike in December, CNBC reported.
Earnings season gets an early start
A handful of large companies report this week, before the biggest banks open third-quarter earnings season in earnest next week, Reuters reported. Constellation Brands is scheduled to report after the market closes Tuesday, and Levi Strauss after the close Wednesday, according to Kiplinger’s earnings calendar.
PepsiCo reports before the opening bell Thursday. Analysts expect earnings of $2.30 per share, up from $2.29 a year earlier, on revenue of $24.98 billion, up 4.4%, Kiplinger reported. The stock had fallen 9% this year through Sept. 30. Deutsche Bank analyst Steve Powers recently downgraded the shares to hold from buy, saying he had less certainty about the company’s strategic direction in North America.
Delta Air Lines closes out the week with results before the opening bell Friday. Analysts expect a profit of $1.94 a share, according to Kiplinger.
Expectations for the season are high. S&P 500 companies are projected to post third-quarter earnings growth of more than 30% from a year earlier, according to LSEG data cited by Reuters. Nelson Yu, head of equities at AllianceBernstein, told Reuters that any changes to capital spending plans at the large cloud companies known as hyperscalers are the top thing to watch, because that spending has lifted profits at many other companies.
Economic data on the calendar
Monday brings the Institute for Supply Management’s September index of activity at service businesses, the biggest part of the U.S. economy. Thursday’s weekly count of applications for jobless benefits will offer another look at layoffs, which have stayed low by historical standards. The University of Michigan’s October consumer sentiment survey is due Friday; in September, households said they were worried about fuel prices and stubborn inflation, the AP reported.
What to watch
History favors stocks at this time of year. The S&P 500 has risen an average of 4.2% in fourth quarters since 1945 and gained in 85% of them, according to CFRA research cited by Reuters. In midterm election years, the fourth-quarter average gain has been 6.4%.
But with the Nov. 3 midterms about four weeks away and long-term yields recently at their highest in more than two decades, some strategists are bracing for turbulence. Tracie McMillion, the Wells Fargo Investment Institute’s head of global asset allocation strategy, told Reuters the firm is on “high alert” for a pullback before Election Day.
