Are Stocks Too Optimistic About China, Tech Earnings, and the Fed?
Are Stocks Too Optimistic About China, Tech Earnings, and the Fed?
By:Ilya Spivak
Stocks seem priced for perfection, so what could go even more right to keep the rally going?
- Wall Street cheered as US CPI inflation data kept Fed rate cut bets intact
- US-China trade tensions seem to ease before Trump-Xi meeting this week
- Reporting season heats up with top tier tech names due to report results
Stock markets scored a second consecutive week of gains, erasing the violent but ultimately brief selloff triggered on October 10. The bellwether S&P 500 and the tech-tilted Nasdaq 100 set new record highs. The critical upward push came late in the week on Friday as US inflation data crossed the wires.
Official economic data has been scarce amid the ongoing US government shutdown, so the markets were understandably wound up as the Bureau of Labor Statistics (BLS) released September’s consumer price index (CPI) report by special dispensation. It showed cooler inflation than expected.
US inflation data keeps the Fed on track to cut interest rates as expected
Headline and core price growth – the latter excluding volatile food and energy prices – matched up at 3% year-on-year. That was a touch softer than the 3.1% result envisioned by consensus forecasts. Most of the uptick seemed to come from energy costs. Perhaps most critically, steady goods inflation was a welcome pause in tariff-linked price gains.
Traders seemed to celebrate after the data passed into the rearview mirror without upsetting Federal Reserve interest rate cut expectations. Since the central bank’s last conclave in September, the markets have been all-but-fully priced for 25-basis-point (bps) rate cuts at this week’s policy meeting and at the one to follow in December.
Risk appetite got another fillip at the start of this week after trade talks between the US and China over the weekend in Malaysia produced a raft of agreements ready to be endorsed by presidents Donald Trump and Xi Jinping when they meet later this week. That marks the clearest sign yet that both sides are keen to walk back recent escalation.
Do stocks need to worry as top tech earnings reports loom ahead?
With two key macro risks – an upending of Fed rate cut bets and US-China trade war escalation – thus seemingly defused, the earnings docket comes into focus. A flood of third-quarter results is on the menu, but the spotlight will almost certainly shine brightest on mega-cap tech names once again.
Updates from Microsoft Corp. (MSFT), Alphabet Inc. (GOOG), Meta Platforms (META), Apple Inc. (AAPL), and Amzon.com (AMZN) are due. So far, tech has outperformed with third-quarter earnings growth of 22.3%. Semiconductors lead the way. The average for the S&P 500 stands at 9.2% for now, with 29% of companies having reported.
That seems like a relatively rosy backdrop, hinting that – absent an unlikely shock result for one of the tech sector giants – news on the earnings front is unlikely to derail risk appetite. For speculators, this raises an important question: with stock benchmarks hugging record highs, how much of this benign backdrop has been priced in already?
Markets priced for perfection may find little impetus for gains as traders’ cheery expectations are validated. That could leave them vulnerable to a “buy the rumor, sell the news” dynamic. Moreover, the slightest bit of disappointment might generate an outsized “risk off” response as skewed sentiment resets.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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