US financial markets pulled back as investors looked past better-than-expected earnings and focused their attention on rich valuations. Palantir Technologies was a prime example of this, as it reported fantastic earnings but sold off in the aftermath due to concerns about its valuation.
According to FactSet, 91% of the S&P 500 companies have reported Q3 earnings, and 82% of those that have reported have beaten earnings per share estimates, while 77% have beaten revenue estimates. Earnings per share growth has been much better than expected, coming in at 13.1% versus the consensus estimate of 7.9%. Similarly, revenue growth is 8.3% for the quarter versus the estimated 6.3%.
That said, a noticeable shift away from growth and mega-cap issues to value led to questions around market leadership by the magnificent seven. As we know, these Mag-7 names have dominated the market over the last several years, and if investors move away from this cohort, it would have a meaningful impact on overall market returns given their current weightings within the indices. Of course, one week’s market action does not dictate that this trend will continue.
Artificial Intelligence news continued to be prominent on the tape as Amazon and OpenAI announced a multi-year, 30+ billion dollar deal. And Google announced that its AI chip would be available soon. Iren and Microsoft announced a $9.7 billion deal to secure energy for Microsoft’s AI initiatives. Other corporate news included the approval of a $1 trillion pay package for Tesla’s leader, Elon Musk, contingent upon achieving certain milestones. Kimberly-Clark announced it would buy Tylenol maker Kenvue in a deal valued at $48.7 billion.
Concerns continued to mount over the economy as the US government shutdown eclipsed 40 days- the longest shutdown on record. Air Travel has been curtailed with cancellations and delays, and these are likely to increase in the coming week if the shutdown continues. There is a sense among several Wall Street strategists that a deal will be reached this week, which could bolster the buy-the-dip action that emerged in the market on Friday afternoon.
The S&P 500 lost 1.6%, the Dow Jones Industrial Average gave back 1.2%, the NASDAQ Composite tumbled 3%, and the Russell 2000 fell by 1.9%. US Treasuries had mixed action across the curve, with shorter-tenured paper outperforming longer-tenured issues. The 2-year yield declined by five basis points to 3.56%, while the 10-year yield decreased by one basis point to close the week at 4.09%. West Texas Intermediate crude prices fell by 2% or $1.22 to close the week at $59.73 a barrel. Gold prices increased by $14.00 to $4010 per ounce. Copper prices fell by $0.13 to $4.96 per Lb. Bitcoin’s price fell by 7.5% and at one point broke below $100k, but closed the week at $101,600. The US Dollar index fell by 0.1% to 99.60.
The economic calendar remained quiet due to the government shutdown, but some significant data was released. ISM Manufacturing showed its eighth consecutive month of contraction, coming in at 48.7 versus the prior month’s figure of 49.1. On the other hand, ISM services increased to 52.4 from the prior reading of 50 but showed the highest prices paid figure in three years. ADP private payrolls increased by 42k versus the estimated 15k.
The Challenger, Gray, and Christmas report showed the highest number of layoffs in October since 2003, at 85,979, up 39% from July. A preliminary look at the University of Michigan’s Consumer Sentiment Index showed a decline to 50.3 from the prior reading of 53.6 and down from 71.8 from a year ago. The decline in sentiment was widespread across the population, with decreased Consumer Expectations and increased expectations for inflation over the next year.