Uneasy investors face a huge week from earnings and volatile interest rates

With global markets on edge because of rising Middle East tensions, what happens with bond yields may count as much as this week's results from Microsoft, Alphabet, Meta and Amazon.

Oct 23, 2023 - 07:30

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Uneasy investors face a huge week from earnings and volatile interest rates

If you been thinking of buying a home or a car, you have been startled by what's happening with interest rates.

The sharp jump in key rates since the end of July have pushed rates for homes, cars and other big-ticket items much higher.

A home mortgage might run you 8%. A new-car loan might run at just under 8%. A used-car loan will easily top 8%.

Interest rates rule

The Federal Reserve has boosted rates from near zero in early 2022 to 5.25% to 5.5% in a campaign to bring U.S. inflation down to 2% from a peak of around 8% in 2022.

That campaign is having a profound effect on the U.S. and the world. Companies know it and feel it. They may well talk about it this week, when more than 1,500 companies report quarterly results.

They will certainly acknowledge that interest rates are a problem and that the domestic economy is stressed and that many organizations want and need money.

Among the most important organizations needing cash is the United States government, trying to defend a big domestic budget and the costs of extending aid to Ukraine and Israel.

All of this brings us back to interest rates and bonds.

Probably the mostly widely watched rate in the world is the yield on the U.S. 10-year Treasury note. It rose more than 40% this past spring and summer, peaking at 4.99% on Oct. 19 and ending the week at about 4.92%. The 4.99% peak was the highest since late July 2007 when a near-collapse of the U.S. financial system started to unfold.

The question is if the pullback from 5% on the 10-year at last week's end is a one-time blip or something bigger. Possibly. Oil prices surged into late September and have slipped back, despite the Hamas-Israeli crisis.

Futures trading late Sunday are unclear on the direction.

Rates moving so fast have slowed home sales in particular, with some lenders charging 8% or more for mortgages, and investors have had to recalculate the values they place on stocks.

Tesla (TSLA) - Get Free Report was a prime casualty, falling 15.6% last week after its third-quarter results failed to cheer Wall Street.

Tesla was hardly alone. The Standard & Poor's 500 Index (^IN) - Get Free Report fell 2.4% on the week. The Nasdaq Composite (^COMPX) - Get Free Report fell 3.2%, and the iShares Dow Jones U.S. Home Construction ETF, which tracks home builders and building-materials suppliers, fell 4.2%. It has fallen 7.8% so far in October on top of a 9% loss in September.

The Dow Jones Industrial Average (^DJI) - Get Free Report dropped a more modest 1.6% for the week, but just six Dow stocks saw gains, led by McDonald's (MCD) - Get Free Report, up 3.95%, and Coca-Cola (KO) - Get Free Report, up 3.2%.

Thanks to last week's volatility, the indexes are starting to move closer to levels that would indicate stocks are oversold.

So, watch the 10-year rate.

GDP report will offer a snapshot of economic health

There are not a lot of big economic reports coming this week.

Biggest is the third-quarter Gross Domestic Product report due before U.S. financial markets open. The consensus is that the report on total economic activity rose at a 4.1% annualized rate. It will be revised in the months ahead.

But a 4% growth rate would give the Federal Reserve the incentive to leave interest rates where they are.

The Fed has signalled it won't cut its key federal funds rate (now 5.25% to 5.5%) until next spring. Wall Street is hoping rate cuts come sooner.

Friday brings some important reports on consumer behavior. The University of Michigan's Consumer Sentiment Index is widely followed. Consumers have been worried about inflation in recent months and are less optimistic.

Four giant tech companies set to report

Next week's earnings include reports from four of the biggest U.S. companies: Microsoft (MSFT) - Get Free Report and Google parent Alphabet on Tuesday afternoon, Facebook parent Meta Platforms (META) - Get Free Report on Wednesday and online retail giant Amazon (AMZN) - Get Free Report on Thursday. Apple doesn't report until Nov. 2. Chip maker Nvidia (NVDA) - Get Free Report doesn't report until Nov. 15.

The stocks of all are up big this year: 36% for Microsoft; 54% for Alphabet; 156% for Meta (after a horrible 2022); and 49% for Amazon.

They are, in fact, so big in terms of market capitalization that their moves can distort what is going on in such key indexes as the S&P 500, the Nasdaq and the Nasdaq-100 (^NDX) - Get Free Report.

The group — Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla — now have their own name: the Magnificent Seven.

As of the end of September, the top 10 S&P 500 stocks by market cap starting with Apple (AAPL) - Get Free Report (which reports Nov. 2) and Microsoft, represented 30.6% of the index's total value, according to S&P Dow Indices, which tracks these things. The index is built to give bigger stocks more weight.

As a result, there is a huge difference between the performances of the S&P 500 index and S&P 500 Equal Weight Index. The S&P 500 was up 10% for the year through Oct. 20. The equal-weighted index is actually down 3% for the year.

The ten stocks are the Magnificent Seven, plus a second class Alphabet, Berkshire Hathaway (BRK.B) - Get Free Report and ExxonMobil (XOM) - Get Free Report.

Also coming this week:

Tuesday: General Electric (GE) - Get Free Report, General Motors (GM) - Get Free Report, Coca-Cola (KO) - Get Free Report, and truck-maker Paccar (PCAR) - Get Free Report.