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As major indices continue to look weak and test key technical levels, ongoing market sentiment is difficult to judge, with several crucial information points coming up over the next few days.
#1 The Fed Rate Decision
The Federal Reserve’s narrative remains hawkish in terms of medium-term interest rates. Friday’s PCE data did little to calm fears of not only a prolonged period of high interest rates but also the possibility that there may not be any rate reduction considered until Q2 2024.
As always, it will be not only Wednesday’s actual decision (which is expected to be a pause at the current 5.5%) but also the statement and subsequent press conference by Jerome Powell that are likely to have the major market impact.
#2 Middle Eastern Conflict
With the escalation of conflict in the Gaza Strip, and with Israeli ground forces now pushing over the border, concerns will continue as to whether the conflict will be contained within that area or if there is a possibility of a broader conflict ensuing.
While most Western governments are calling for a humanitarian ceasefire to get aid into Gaza—and concerns are rising regarding the ever-increasing civilian casualties—markets will be fearful of further escalation, increasing destabilization in the area, and the ramifications of such not only on energy prices but also on global markets as a whole.
#3 US Company Earnings
As we enter the new and busiest week (Week 3) of Q3 earnings reporting season in the US, to date, 49% of the S&P 500 companies have reported. An impressive 78% have reported a positive EPS surprise, and 62% of S&P 500 companies have reported a positive revenue surprise. The blended year-over-year earnings growth rate for the S&P 500 is at 2.7%. If this turns out to be the actual growth rate for the quarter, it will mark the first quarter of year-over-year earnings growth in two years.
With the forward 12-month P/E below the 5-year moving average of 17.1, this suggests stock valuations are favourable. Normally, without current market pressures—including 16-year highs on US Treasuries—this would bode well for stocks going forward; however, at this stage, headwinds remain strong for any immediate uptick in stock prices.
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