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Key Areas of Interest: Middle East Developments, Consumer Price Index (CPI), and Q3 Earnings Outlook

Stock Market Preview: Middle East Conflict, CPI, and Q3 Earnings in Focus

The Stock Market Outlook

The stock market ended last week on a positive note, with the S&P 500 closing 0.5% higher after a strong rally fueled by the release of September’s jobs data. The report indicated a slowdown in wage growth, raising optimism that the Federal Reserve may not need to raise interest rates again.

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However, this week began with a slide in U.S. stock index futures due to a surprise attack by Hamas on Israel over the weekend. This unexpected event sent global markets into risk-off mode.

The Conflict’s Impact

The course of the conflict remains uncertain, but analysts at Alpine Macro predict that it will likely escalate, leading to a risk-off global environment over the next 1-3 months.

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As a result, the Dow Jones Industrial Average fell 0.3% despite the previous Friday’s rally, closing below its 100-day moving average. Conversely, the Nasdaq Composite Index rose 1.6% thanks to a strong performance from tech stocks.

Upcoming Economic Data

This week, investors will closely watch the release of key economic data. On Wednesday, the Consumer Price Index (CPI) and Wholesale Price Index (WPI) data will be published. On Thursday, the latest inflation figures will be released, marking the highlight of the week.

Economists at BofA predict a 0.3% increase in headline CPI and a 0.2% increase in core CPI. They anticipate that used car prices will drive a decline in core goods prices, while shelter costs will continue to boost core services.

Q3 Earnings Season

The third quarter earnings season is set to begin later this week, with major U.S. banks reporting on Friday. Consensus estimates suggest a 2% growth in sales, an 11.2% margin contraction, and flat earnings per share compared to the previous year. Excluding the energy sector, S&P 500 earnings are expected to grow by 5%.

Goldman Sachs strategists maintain their S&P 500 EPS estimates of $224 for 2023 and $237 for 2024, forecasting 1% and 5% growth, respectively. They predict a 5% growth in S&P 500 EPS to $250 in 2025, supported by near-trend economic growth and moderating inflation pressures.

Analysts’ Perspectives

Several analysts have weighed in on the current state of U.S. stocks:

  • Evercore ISI analysts believe that the correction may have run its course and suggest adding exposure to structural growth themes.
  • JPMorgan analysts caution that equity valuations may not benefit from lower bond yields if earnings and the broader economy disappoint.
  • Wells Fargo analysts anticipate larger-cap secular growth to outperform value and cyclical stocks in a rising rate environment.
  • BTIG analysts believe that the bond/stock correlation will flip, with rates falling as stocks experience more downside.

As the week unfolds, investors will closely monitor the conflict in the Middle East, the release of economic data, and the start of earnings season. The stock market’s performance will likely be influenced by these factors, providing opportunities for both short-term traders and long-term investors.

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