Recession worries continue to haunt Wall Street. A key bond market indicator is flashing signs of a potential slowdown.
The spread between very short-term 3-month Treasury yields and the benchmark 10-year yield reversed briefly on Tuesday evening and did so again on Wednesday. This means that short-term bond yields were higher than longer-term ones. Both are currently hovering around 4%.
This is a bad sign – and often precedes recessions – because it shows how nervous investors are. Typically, short-term bonds have much lower yields because investors expect to earn higher returns for borrowing money for longer periods of time.
Another key yield curve, the difference between 2-year and 10-year Treasuries, has been consistently inverted since early July after reversing briefly in March.
However, stocks have strongly rebounded in Octoberdespite continuing concerns about inflation globally, a strong dollar that hurts multinationals and political and economic unrest in the UK. Much of the optimism has to do with investors hoping that the Federal Reserve will soon begin to ease its pace of raising interest rates.
But there is another reason. The earnings have actually been, to quote Larry David of “Curb Your Enthusiasm,” pretty, pretty good. Just avoid the once hot tech sector.
Alphabet, owner of Google
(GOOGL) and Microsoft
(MSFT) disappointed investors with their latest insights later Tuesday. Chip giant Texas Instruments
(TXN) and streaming music company Spotify
(PLACE) also disappointed Wall Street.
All four stocks fell on Wednesday. And that’s a big reason why the Nasdaq fell 2%, although the broader market held up a little better. The Dow finished the day with a measly 2 points, while the S&P500 was down just 0.7%. But the Dow was up more substantially earlier in the day, and the S&P 500 was also briefly green..
Top tech (i.e. what used to be called FAANG stocks before the name and ticker changes) make up a large portion of the S&P 500’s weighting. Investors are now awaiting news from the Facebook owner . Metaplatformswhich reports earnings after the closing bell on Wednesday, and Amazon
(AMZN) and apple
(AAPL)including the report on Thursday afternoon.
Weakness in technology is weighing on earnings forecasts for the broader market. According to data from FactSet senior earnings analyst John Butters provided to CNN Business on Wednesday morning, analysts now expect third-quarter earnings growth of just 0.6% for the S&P 500. That’s down. from estimates of 1.5% as recently as Friday.
Wall Street predicts earnings will fall for both the technology and communication services sectors.
“I still don’t like technology. There are not many values. These companies are no longer growing skyward,” said Brian Frank, Chief Investment Officer of Frank Funds.
Look beyond the technology and there are many more positives to be found in Corporate America report cards.
Credit card giant (and Dow component) Visa
(V) announced earnings and revenue that beat analysts’ expectations, and the company also increased its dividend. Kraft-Heinz
(CC) released strong results on Wednesday morning, sending its stock higher. This good news follows the good results of GM
(GM) and Coca-Cola
(NOPE) Tuesday morning.
Many sectors of the economy are still doing well. Along these lines, FactSet data shows that analysts are expecting double-digit percentage growth in earnings for consumer discretionary companies, industrials and real estate companies. And profits in the energy sector are expected to more than double, thanks to soaring oil prices this year.
Two other encouraging signs? Nearly three-quarters of S&P 500 companies that have reported earnings so far have exceeded forecasts. (The missing earnings, naturally, are getting more attention on Wall Street.)
In addition, demand still seems to be holding up for many companies. Revenue is expected to rise 8.6% in the quarter, according to FactSet. So the lower profits are more a function of higher costs than a significant slowdown in sales.
“Overall, earnings are doing well given the environment,” said Max Wasserman, senior portfolio manager at Miramar Capital.