Record highs and quiet losses
Who’s leading the S&P 500 charge?
On Tuesday, the S&P 500 closed above 7,800 for the first time, its 28th record of the year and its first since mid-August. The Nasdaq set a record too. On that same day, 182 Nasdaq stocks had new 52-week lows compared to just 61 stocks with new highs.
This amounts to a stealth correction. Only about a quarter of stocks are trading above their 50-day moving average, and fewer than half above their 200-day. The Dow sits at roughly 5% below its August record, and Caterpillar (a construction and mining equipment company) fell by 6% Wednesday, as industrial stocks led the retreat. A handful of mega caps are holding the index up while the average stock is dropping.
Two forces are squeezing the market from opposite sides. Earnings are booming, with profit margins near record levels. Yields keep rising, with the 10-year touching 5.34% on Wednesday, its highest level since 2002. The trailing price-to-earnings ratio is down about 10% from a year ago, even as profits climb. The index is holding up because earnings are rising faster than the multiple is falling.
What happened to Micron Technology’s earnings and stock price?
Micron Technology (a U.S.-based semiconductor manufacturer) reported its earnings at the end of last week, and the numbers were extraordinary. Revenue nearly quadrupled to $54.2 billion, data centre revenue jumped elevenfold, and the company’s forecast called for revenue of $61.5 billion in the next quarter. Management said supply is expected to stay tight through 2028, with more than 75% of next year's shipments already locked in.
Yet, the company’s stock barely moved, closing up 3% the next day, still below its June record, despite earnings exploding since then. This week, stocks in the memory chip and data storage market eased again. Stock in SK Hynix (a South Korean semiconductor company) slid due to the company issuing a caution on its earnings, and by Thursday semiconductors were falling as oil and yields climbed, and the argument that data centre spending has peaked resurfaced.
Memory is the most cyclical corner of the chip business, and investors pay the lowest multiple when earnings look best, because they doubt those earnings will last. Micron technology's results prove the demand, but the stock price asks how long it will last. This is also a stealth correction: when profits go up sharply, valuations come down.
What is complicating the Fed’s next interest rate decision?
Minutes from the U.S Federal Reserve’s (the Fed) September meeting (released on Wednesday) showed that all 18 officials backed the rate increase (the first since 2023), and most expect another quarter point before year-end, though they gave no hint on timing.
The data since then has complicated matters. September payrolls added just 29,000 jobs, unemployment rose to 4.2%, and the prior two months of job data were revised down by 60,000. The odds of a rate increase in October collapsed to about 20% from roughly 64% before the report. Yet a New York Fed survey released Wednesday showed consumers' one-year inflation expectations at their highest since May 2023.
That is an uncomfortable pairing: a softening labour market alongside rising inflation expectations. A committee that is keen on increasing rates now has a reason to pause in October and a reason to move in December. Bonds reflect the bind. Ten-year U.S. Treasury yields dropped slightly on Wednesday, but only after a government auction of 10-year notes, while Treasuries with long yields remained near two-decade highs.
What can we expect from this earnings season?
Earnings season will open next week with the big banks, followed by the September U.S. Consumer Price Index on October 14 and the Producer Price Index (both are indicators of inflation) and retail sales on the 15th, the last major data before both U.S. and Canadian central banks meet on October 28 to decide on whether to hold, reduce or increase their interest rates. After a week when the S&P 500 set records, yet most stocks sat it out, the question is whether earnings can pull the rest of the market up or if yields will keep pulling the multiple down.
Listen to the latest podcast from the IG Investment Strategy Team for further insights.
