Markets React to Middle East Conflict and Tech Earnings Anticipation

Economic uncertainties and geopolitical risks shape market sentiment

• Mixed market performance with rising volatility due to Middle East tensions and geopolitical uncertainties.
• Tech sector earnings in focus, led by "Magnificent Seven," poised for a 34% Q3 growth.
• Economic data, housing metrics and Fed speeches to impact markets; Retail sales and consumer behavior monitored.

Last week, the financial markets displayed a mixed performance, with the S&P 500 recording marginal gains while the Nasdaq Composite saw a minimal decline of less than one percent. Notably, the week concluded with a substantial increase in market volatility, primarily on Friday, as the VIX surged by over 10%. These fluctuations were attributed to heightened apprehension regarding the situation in the Middle East, which also propelled oil prices upward by 6% and bolstered gold prices by 5% over the course of the week. As the new week commences, various factors contribute to the potential for turbulence in the financial landscape, including geopolitical tension, domestic political uncertainties, a slew of forthcoming economic data and the beginning of the earnings season.

On the geopolitical front, the situation in Israel remains fluid, with the possibility of a ground invasion of Gaza looming. Concern about potential contagion have driven oil prices higher. Additionally, renewed tension has arisen between the United States and China, particularly about advanced semiconductor technology. The Biden Administration is contemplating additional restrictions on these crucial components, which would supplement existing measures.

In the corporate arena, last week brought final regulatory approval for the merger of Microsoft and Activision Blizzard. Consequently, Activision Blizzard has been replaced in the S&P 500 by Lululemon, and the latter's shares have already seen a 5% rise in premarket trading. The upcoming week holds the promise of significant third-quarter earnings reports, commencing with Goldman Sachs before Tuesday's opening bell. Notably, Wednesday's post-close reports will include earnings updates from both Netflix and Tesla.

Prior to the earnings rush, Pfizer issued a reduction in its revenue and earnings forecasts, causing a fractional dip in its stock during premarket trading. Additionally, Rite Aid filed for bankruptcy on Sunday, citing a combination of debt burdens and lawsuits stemming from the opioid crisis as key factors.

Amid the upcoming earnings reports, particular attention will be directed toward the technology sector. Tech stocks have been a driving force in the market throughout the year, with a focus on what has been referred to as the "Magnificent Seven." Among them, Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Microsoft (MSFT) and Nvidia (NVDA) constitute one quarter of the S&P 500 market capitalization. These companies are collectively projected to exhibit average third-quarter earnings growth of 34%. It will be of great interest to observe their financial performance and future outlook, especially in light of the strong U.S. dollar and any potential challenges it poses for international sales. Notably, Alphabet and Amazon have seen their stock prices surge by over 50% so far this year, while Apple and Microsoft have experienced nearly 40% gains.

On the economic front, various data releases are scheduled, with a focus on housing-related metrics. Wednesday will offer insight into housing starts, while Thursday will provide updates on existing home sales. Before those reports, Tuesday will feature the release of Retail Sales data, an essential indicator of consumer spending trends. This is especially pertinent following recent comments by JPMorgan Chase CEO Jamie Dimon, who noted signs that consumers are reducing debt and curbing expenditures. Throughout the week, an array of Federal Reserve officials will be delivering speeches, with Fed Chairman Jerome Powell slated to speak Thursday midday.

Today, market watchers will be keen to observe whether volatility contracts after the significant expansion witnessed Friday. The surge in volatility was largely driven by concern over potential developments in the Middle East over the weekend. Consequently, it remains to be seen whether these apprehensions recede now that the weekend has concluded, or if they persist, keeping volatility elevated. As always, adhere to your investment plan and focus on long-term objectives.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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