By Jack Kraft, Vice President, Investment Strategist
Print This Post
Equity investors got their first taste of volatility on Friday since what has seemed like a relentless upward ascent from the tariff-induced sell-off six months ago. On Friday, risk assets sold off, with the Nasdaq plunging 3.6% following a Truth Social post by President Trump that stoked fears of worsening trade relations between the United States and China. In the post, Trump threatened an additional 100% tariff on China in response to new export controls on rare earth minerals. China controls about 70% of the global supply of rare earth metals, which are critical for modern-day technology, such as automobiles, defense and semiconductors. The U.S. stock market erased $2 trillion in market capitalization in a single day with other assets such as oil and cryptocurrencies also seeing large declines.
U.S.-China tensions have been a point of volatility for markets all year with the Trump Administration renegotiating trade policy to increase tariffs and incentivize reshoring of domestic manufacturing. Now a similar flare-up has occurred between the two countries. Over the past few months, the United States has announced export controls on semiconductor and semiconductor equipment to China. This sparked China to respond with tougher export controls on critical minerals used in manufacturing high-tech computer chips. The United States has taken steps to decrease dependence on Chinese rare earth metals, with the Pentagon most recently exploring the purchase of as much as $1 billion worth of critical minerals inventory.
For the week, the S&P 500 finished 2.4% lower, while the tech-heavy Nasdaq lost 2.5%. Meanwhile, the Dow underperformed its peers, losing 2.7% over the five-day stretch. Nine of the 11 S&P 500 sectors finished the week in negative territory, with energy and consumer discretionary losing more than 4%. The lone two sectors to buck the downtrend were the traditionally defensive stocks: utilities and consumer staples.
Sell-offs and volatility are like a small toll that long-term investors pay to be in the market. For starters, stocks just passed the six-month point from the tariff-tantrum low back in April, with major indices posting some of the strongest gains on record over that time frame. To lighten Friday’s blow, it is important to remember that stocks on average experience a 3% and 5% drawdown roughly seven and three times per year, respectively. There are a few reasons to see this initial sell-off as opportunistic. The first is very simple and should be easy to remember since Liberation Day was not too long ago. The Trump Administration’s bark tends to be worse than its bite when it comes to tariff threats. This can already be seen as President Trump appeared to walk back the harsh tone issuing a statement saying, “it will all be fine,” in reference to U.S.-China relations. The second reason to not buy into the fear is that companies with Chinese-exposed supply chains have had a six-month head start on mitigating tariff impacts.
Profit margin and earnings growth have remained resilient, and one tweet doesn’t look to have derailed the current bull market. In fact, Bespoke Investment Group pointed out that this Sunday marked the three-year anniversary of the current bull market that started back on Oct. 12, 2022. On average, bull markets last 6.5 years, and a minor speed bump in U.S.-China relations is not likely the catalyst to slow the current business cycle.
Taking a look at a preview to earnings season reiterates the argument for further growth, with analysts expecting a 6% increase in earnings-per-share (EPS) growth. As usual, analysts have set a low bar for corporations this quarter when the past three quarters have printed double-digit EPS growth and beat expectations by 500 basis points. The two constant themes to watch this quarter are tariff impact to profits and commentary on artificial intelligence (AI). Tariffs are still being collected, with revenue from import taxes totaling roughly $90 billion in the third quarter. Annualizing that figure is about 10% of corporate profits and is not considered a rounding error by any stretch. On the other hand, investor focus will also be on AI-related revenue and capital expenditures (capex). Market participants are looking for mega-cap technology companies to reaffirm their AI capex guidance and demonstrate return on investment, reinforcing the sustainability of future spending.
Economic data has been absent since the Oct. 1 government shutdown, which will make the U.S. Federal Reserve’s (Fed’s) job tougher at the upcoming meeting. Currently, about 2 million workers have had their pay suspended, with roughly 750,000 government employees furloughed. Prediction markets are seeing a 61% chance of the shutdown lasting more than 30 days, which will cause military personnel to miss paychecks on Oct. 15. The longer the shutdown lingers, it will likely cause inconveniences and travel delays at airports. The Department of Labor has pledged to release the Consumer Price Index inflation report, which will be key for Fed officials and the Social Security annual cost of living adjustment. According to CME Group’s FedWatch tool, traders are pricing in a 97% chance of a 25-basis-point cut to the federal funds rate ahead of the October Fed meeting.
Looking ahead to this week, investors will turn their attention to the kick-off of third-quarter earnings season. Financials will be in focus all week, with reports from JP Morgan, Goldman Sachs, BlackRock, Wells Fargo, Bank of America, S&P Global, and American Express. Notable health care companies issuing profit results include J&J and Abbott. Other notable companies reporting that will garner attention are ASML, Domino’s Pizza, United Airlines, JB Hunt and SLB. Economic data will likely continue to be disrupted, unless the government shutdown is resolved. Meanwhile, key Fed leaders will give speeches ahead of the Oct. 29 Federal Open Market Committee (FOMC) meeting. Michelle Bowman and Christopher Waller will speak twice this week and will be closely watched with both Fed governors on a short list to be Fed Chair nominees to replace Jerome Powell in early 2026.
Economic Calendar (October 13 – October 17)
| Time (ET) | Report | Period | Median Forecast | Previous |
| MONDAY, Oct. 13 | ||||
| 12:55 PM | Philadelphia Fed President Anna Paulson speaks | |||
| TUESDAY, Oct. 14 | ||||
| 6:00 AM | NFIB optimism index | Sept. | — | 100.8 |
| 8:45 AM | Fed governor Michelle Bowman speaks | |||
| 12:20 PM | Fed Chair Jerome Powell speaks | |||
| 3:25 PM | Fed governor Christopher Waller speaks | |||
| WEDNESDAY, Oct. 15 | ||||
| 8:30 AM | Empire State manufacturing survey | Oct. | -0.5 | -8.7 |
| 12:10 PM | Atlanta Fed President Raphael Bostic speaks | |||
| 1:00 PM | Fed governor Christopher Waller speaks | |||
| 2:00 PM | Fed Beige Book | |||
| THURSDAY, Oct. 16 | ||||
| 8:00 AM | Richmond Fed President Tom Barkin speaks | |||
| 8:30 AM | *U.S. retail sales | Sept. | 0.40% | 0.60% |
| 8:30 AM | *Retail sales minus autos | Sept. | 0.40% | 0.70% |
| 8:30 AM | *Producer price index | Sept. | 0.30% | -0.10% |
| 8:30 AM | *Core PPI | Sept. | — | 0.30% |
| 8:30 AM | *PPI year over year | — | 2.60% | |
| 8:30 AM | *Core PPI year over year | — | 2.80% | |
| 8:30 AM | *Initial jobless claims | Oct. 11 | — | NA |
| 8:30 AM | Philadelphia Fed manufacturing survey | Oct. | 10 | 23.2 |
| 9:00 AM | Fed governor Stephen Miran speaks | |||
| 9:00 AM | Fed governor Christopher Waller speaks | |||
| 10:00 AM | *Business inventories | Aug. | 0.20% | 0.20% |
| 10:00 AM | Home builder confidence index | Oct. | — | 32 |
| 10:00 AM | Fed governor Michelle Bowman speaks | |||
| FRIDAY, Oct. 17 | ||||
| 8:30 AM | *Housing starts | Sept. | 1.31 million | 1.31 million |
| 8:30 AM | *Building permits | Sept. | 1.35 million | 1.31 million |
| 8:30 AM | *Import price index | Sept. | 0.10% | 0.30% |
| 8:30 AM | *Import price index minus fuel | Sept. | — | 0.40% |
| 9:15 AM | *Industrial production | Sept. | 0.10% | 0.10% |
| 9:15 AM | *Capacity utilization | Sept. | 77.30% | 77.40% |
| *Data subject to delay if government shutdown continues | ||||
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market