Tech Earnings, Bond Yields, and Middle East Developments: Insights for the Upcoming Week
23th October, 2023
The year 2023 has witnessed the remarkable ascent of seven tech giants – Apple, Amazon, Meta, Alphabet, Nvidia, Tesla, and Microsoft – collectively referred to as the “magnificent 7.” Their impressive performance has significantly impacted the broader market, with the S&P 500 up 10% year-to-date, the Dow holding steady, and the NASDAQ 100 surging by 33%. Nevertheless, recent market dynamics suggest a subtle shift in the tone of this rally. In the past month, the S&P has dipped by -2%, the Dow by -2.4%, and NASDAQ, while still robust, has shown a more modest -0.95% increase. This is partly due to companies like Netflix, which delivered strong earnings reports.
Tech Earnings in Focus
This week, investors are poised for a flurry of tech earnings reports that could steer the market’s direction. On Tuesday, we await earnings reports from Microsoft and Alphabet, while Meta is set to report on Wednesday, and Amazon will follow suit on Thursday. Thus far, Q3 earnings have largely exceeded expectations, with 73% of S&P 500 companies reporting actual earnings per share (EPS) above estimates. Notably, Netflix has been a standout performer, benefiting from a surge in new subscribers thanks to their crackdown on password sharing. However, in stark contrast, Tesla’s shares experienced a 9.3% drop, primarily attributed to lackluster figures in gross margin, profitability, and foreign exchange (FX) impact. Elon Musk, the company’s CEO, also voiced concerns about the potential adverse effects of rising interest rates on Tesla’s car sales.
The importance of this week’s earnings reports cannot be overstated. As previously noted, a handful of tech giants have been the driving force behind the financial markets. Four of these critical players are about to disclose their financial results. A subpar earnings report from one or two of these companies could significantly influence the performance of equity markets for the remainder of 2023.
Bond Yields and U.S. Borrowing
In the realm of bond markets, U.S. 10-year treasury yields are hovering near the 5% threshold, a level not seen since 2007. This surge in long-term yields reflects the market’s acknowledgment that base interest rates may remain elevated for an extended period. Additionally, the anticipation of substantial U.S. borrowing has contributed to the upward pressure on yields. Just last week, Washington reported a budget deficit of $1.695 trillion for fiscal year 2023, marking a substantial 23% increase over the previous year and exceeding all pre-pandemic budget shortfalls.
Middle East Developments and Their Impact
Amid all these financial considerations, it is vital to examine the broader macroeconomic context. The ongoing Middle Eastern conflict has grabbed global attention. In the midst of ongoing tensions in the world’s largest oil-supplying region, the release of hostages by Hamas during a diplomatic window has had only a marginal impact on easing the overall tensions. It has however caused a slight retreat in oil futures, with U.S. crude trading 0.5% lower at $87.64 a barrel, and the Brent contract dropping 0.4% to $91.83 a barrel. However, it’s important to note that the situation remains highly volatile, as Israeli forces have surrounded Gaza, and a full ground invasion could potentially disrupt oil supply.
Volatility on the Rise
As anticipated during times of crisis and uncertainty, market volatility has surged. The VIX, which measures volatility for the S&P 500, has finally breached the 20 barrier after 105 consecutive days below that threshold. This represents the longest streak since 2019, underscoring the impact of recent global events on market sentiment.
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