Market Overview
On Friday, the S&P 500 Index ($SPX) (SPY) ended up +0.01%, while the Dow Jones Industrial Average ($DOWI) (DIA) rose +0.51%. In contrast, the Nasdaq 100 Index ($IUXX) (QQQ) closed down -0.43%. December E-mini S&P futures (ESZ25) rose +0.01%, while December E-mini Nasdaq futures (NQZ25) fell -0.44%.
Index Performance and Market Sentiment
Stock indexes finished mixed on Friday, achieving new all-time highs for the S&P 500, Nasdaq 100, and Dow Jones. Initially, there was a surge in stock prices, especially among chipmakers and AI-related infrastructure companies, reflecting optimism about corporate profits from growth in the AI sector. However, rising bond yields led to profit-taking in interest-sensitive tech stocks, as the 10-year T-note yield increased by +4 basis points to 4.12% following hawkish remarks from Fed officials regarding interest rates.
Economic Indicators
Despite earlier gains, stock indexes pulled back as the September ISM services index fell to a four-month low, more than anticipated. Additionally, signs of inflationary pressures within the service sector negatively impacted both bond prices and stocks. The ongoing government shutdown, now in its third day, also dampened market confidence. This shutdown has interrupted the release of crucial government reports, including the monthly payroll figures and upcoming inflation data.
Future Economic Implications
Economists estimate that the government shutdown will result in the furlough of around 640,000 federal workers, which might elevate jobless claims and increase the unemployment rate to 4.7%. In terms of economic indicators, the September S&P composite PMI was revised up slightly to 53.9. Nonetheless, the ISM services index dropped -2.0 to a low of 50.0, with the services price paid sub-index unexpectedly rising, suggesting inflationary concerns persist.
Federal Reserve Insights
Chicago Fed President Austan Goolsbee expressed caution against too many interest rate cuts, noting that inflationary pressures and declining payroll numbers create a challenging situation for the Fed. Dallas Fed President Lorie Logan echoed the sentiment, stating that the Fed should show restraint in cutting rates further, given the distance from inflation targets.
Corporate Earnings Outlook
Expectations for corporate earnings remain strong, with over 22% of S&P 500 companies providing positive guidance for Q3 earnings, the highest outlook in a year. Q3 earnings growth is projected at +6.9%, slightly up from previous estimates. Markets are currently factoring in a 98% probability of a -25 basis point rate cut at the next FOMC meeting scheduled for October 28-29.
International and Sector Performance
Globally, stock markets showed positive results, with the Euro Stoxx 50 rising +0.10%, while Japan’s Nikkei Stock 225 climbed +1.85%. However, U.S. casino stocks linked to Macau saw declines, following weaker-than-expected travel data from China during a major holiday period. Meanwhile, semiconductor and AI-related stocks, which initially rose, ended the session lower, contributing to a modest drag on the Nasdaq 100.
