By Jack Kraft, CFA, Investment Strategist
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U.S. equities saw mixed performance last week as investors navigated a wave of corporate earnings and economic data. The S&P 500 and Dow snapped six-week winning streaks, closing down 1.0% and 2.7%, respectively, for the week. Conversely, the tech-focused Nasdaq gained 0.2%, marking its seventh consecutive week of gains, supported by strong results from mega-cap stocks, including Tesla surging 22% after an upbeat earnings report. Meanwhile, rising Treasury yields continued to pose a challenge for equities.
Eight of the 11 S&P 500 sectors finished the week in negative territory, with healthcare and industrials suffering the steepest declines. Bucking the downtrend was technology and consumer discretionary stocks. Part of the choppy performance can be the high bar that stocks are facing entering third-quarter earnings season, with the S&P 500 up roughly 22% year-to-date. Meeting expectations has not been enough to be rewarded by investors, with more stocks trading down than up on earnings reports last week.
Equity-market returns over the past decade have been exceptional, with annualized total returns of around 13%, surpassing the S&P 500’s long-term average of 11%. This outperformance has led market participants to question whether returns have been pulled forward, leaving the market at elevated valuations and a historically high concentration in mega-cap stocks. A recent Goldman Sachs report suggests that given the higher interest rate environment, abnormal market concentration and elevated starting valuations, forward annual returns for the cap-weighted S&P 500 are likely to be below average over the next decade. The report projects just 3% annualized returns for the cap-weighted S&P 500, where six of the largest stocks make up almost 30% of the index. However, removing the impact of market concentration by using the equal-weighted S&P 500 forecasts for forward returns increase to 7% annualized over the next 10 years. This underscores the importance of diversification across different indices, such as mid-cap, small-cap and international equities, where valuations may be more attractive relative to historical norms.
One driver of the strong returns for large-cap stocks has been better-than-expected earnings growth. The third-quarter earnings season is off to a solid start, with 37% of S&P 500 companies having reported results. According to FactSet, 75% of these companies have delivered positive earnings surprises, while 59% have exceeded revenue expectations. The blended earnings growth rate for the S&P 500 currently stands at 3.6% year-over-year; if this trend holds, it will mark the fifth consecutive quarter of earnings growth. Sustained earnings momentum and positive forward expectations are essential to justify the S&P 500’s higher-than-average valuation of 21.7 times forward earnings, which is above both the five-year and 10-year average of 19.6x and 18.1x, respectively.
Another sticking point for markets has been how interest rates have reacted to the U.S. Federal Reserve’s (Fed’s) rate-cutting cycle. Despite the Fed lowering its benchmark rate by 50 basis points five weeks ago, Treasury yields have climbed significantly. This increase is partly attributed to concerns over the U.S. fiscal deficit, which is unlikely to improve regardless of whether a Republican or Democrat wins the upcoming election. The Committee for a Responsible Federal Budget estimates that Vice President Harris’s plan would add $3.5 trillion to the debt through 2035, while President Trump’s plan would increase it by $7.5 trillion over the same period. Persistently high fiscal deficits may contribute to a steeper yield curve going forward, with the short end of the curve potentially moving lower due to rate cuts, while the long end remains elevated.
The next Fed meeting is scheduled for November 7, with futures markets indicating a 95% chance of a 25-basis-point rate cut, according to the CMEGroup FedWatch tool. Ahead of the meeting, the Fed will receive two key economic updates: third-quarter GDP data and the October jobs report. The U.S. economy appears to be on track for a soft landing, as the Atlanta Fed’s GDPNow forecast anticipates a robust 3.3% growth rate for the period. However, the labor market outlook is less encouraging, with economists projecting only 110,000 new jobs in October. Given recent labor market softness over the past six months, markets are likely to place greater emphasis on this data when assessing the Fed’s policy direction.
Looking ahead, this week presents a range of market catalysts, with a packed economic calendar and the busiest week for the third-quarter earnings season. Key mega-cap earnings reports will come from Amazon, Apple, Microsoft, Meta Platforms (formerly Facebook) and Alphabet (Google). Other major companies set to report include Visa, Eli Lilly, Caterpillar, Waste Management, Uber, Merck, Chipotle, McDonald’s, Starbucks and semiconductor players AMD, Intel and ON Semiconductor. On the economic front, the spotlight will be on the initial third-quarter GDP report due Wednesday, providing insight into U.S. economic growth. Labor market updates will also be crucial, with nonfarm payrolls data offering a gauge of employment trends. Other key releases include manufacturing Purchasing Managers’ Index (PMI) figures, the Fed’s preferred inflation measure via the personal consumption expenditures (PCE) deflator, and updates on personal income and spending.
Economic Calendar October 28 – November 1
| Time (ET) | Report | Period | Median Forecast | Previous |
| MONDAY, OCT. 28 | ||||
| None scheduled | ||||
| TUESDAY, OCT. 29 | ||||
| 9:00 AM | S&P Case-Shiller home price index (20 cities) | Sep. | — | 5.90% |
| 10:00 AM | Consumer confidence | Oct. | 99.2 | 98.7 |
| 10:00 AM | Job openings | Sept. | 7.9 million | 8 million |
| WEDNESDAY, OCT. 30 | ||||
| 8:15 AM | ADP employment | Oct. | 113,000 | 143,000 |
| 8:30 AM | GDP | Q3 | 3.20% | 3.00% |
| 8:30 AM | Advanced U.S. trade balance in goods | Sept. | — | -$94.2B |
| 10:00 AM | Pending home sales | Sept. | -0.20% | 0.60% |
| THURSDAY, OCT. 31 | ||||
| 8:30 AM | Personal income | Oct. | 0.40% | 0.20% |
| 8:30 AM | Personal spending | Oct. | 0.40% | 0.20% |
| 8:30 AM | PCE index | Oct. | 0.20% | 0.10% |
| 8:30 AM | Core PCE index | Oct. | 0.30% | 0.10% |
| 8:30 AM | Initial jobless claims | Oct. 26 | 235,000 | 227,000 |
| 9:45 AM | Chicago PMI | Oct. | 46.1 | 46.60% |
| FRIDAY, NOV. 1 | ||||
| 8:30 AM | U.S. employment report | Oct. | 110,000 | 254,000 |
| 8:30 AM | U.S. unemployment rate | Oct. | 4.10% | 4.10% |
| 8:30 AM | Hourly wages year over year | 4.00% | 4.00% | |
| 9:45 AM | S&P final U.S. manufacturing PMI | Oct. | — | 47.80% |
| 10:00 AM | Construction spending | Sept. | 0.00% | -0.10% |
| 10:00 AM | ISM manufacturing | Oct. | 47.60% | 47.20% |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market