Wall Street closed out October with a six month positive run, underscoring the market’s remarkable recovery from April’s lows. Sentiment this week was lifted by big tech earnings and positive trade developments, along with another interest rate cut by the Federal Reserve. However, Fed Chair Jerome Powell dampened the mood a little by throwing a December rate cut into flux, warning that such a move was “far from” a foregone conclusion.
Turning to the earnings season, five of the Magnificent Seven companies reported their results this week. Meta Platforms was a disappointment after earnings were hit by a nearly $16B tax charge. Microsoft stock slipped as well despite the firm topping expectations and delivering strong Azure growth. Finally, Apple shares saw a tepid reaction as a quarterly revenue miss for iPhones and China offset a positive sales guidance. Conversely, Google stock gained after it reported its first ever quarter with $100B in revenue. Meanwhile, shares of Amazon soared after company sailed past estimates for net sales, profit, and subscription revenues.
For the week, the S&P 500 index gained 0.7%, while the Dow added 0.8% and the Nasdaq surged 2.2%.
Future Wealth’s View
As the market soars to new highs and the wealth creation amongst the high income earners continues to accumulate, about 42 million Americans (lower income households) face the prospect of seeing their food assistance cut off this week under the Supplemental Nutrition Assistance Program. In addition, the current stock market rally is heavily concentrated on AI companies. If a company is not levered to AI, it is not in a good place. The business cycle is in a different cadence to the economic cycle. The economy is cooling but the AI business cycle is picking up steam.
While most of the earnings was focussed on the Mag 6 companies – Chipotle, Royal Caribbean, Garmin, Cheesecake Factory, Hoka parent Deckers all reported poor results or lowered guidance or missed numbers amidst a weakening consumer. Chipotle in its conference call stated that “the younger consumers making less than $100K of ages 25-34 are eating at home”, a clear sign of decline in discretionary spending.
How and when the stock market rally is going to end is the real question. The problem, of course, is that both unemployment and inflation are rising as the trade war takes its toll, and the shutdown has short circuited government data forcing caution when it comes to further rate cuts, given the uncertain footing. Our view, at Future Wealth LLC, is that rising inflation, rising unemployment or some exogenous shock will be the catalysts that force a correction. The timing of the correction is one that everyone in the world would like to know. But, that means that one should exercise caution and rollback risk.
Wall Street is like a department store. There are things you wouldn’t usually buy, but you figure you’ll take the chance because of the cheap price or the hype. Many of those purchases are the ones you regret later.