Companies are reporting earnings beats on both the top and bottom lines thus far in the third quarter. But it isn’t helping the stock market.
All three of the major indexes closed lower on Thursday. Stocks took a noticeable shift downward after Federal Reserve Chair Jerome Powell indicated the central bank was doubling down on the Fed’s “higher for longer” stance, sending bond yields to their highs of the day.
The move was emblematic of the market over the past several weeks, which has been almost entirely driven by the “pain trade” in bonds.
Evercore ISI senior managing director Julian Emanuel believed that earnings could be one of the catalysts for stocks to trade higher. But bond yields have pressed even higher, conflict in the Middle East has intensified, and the Republican Party still hasn’t decided on a speaker of the House.
“A tilt toward defensive strategies is becoming necessary,” Emanuel wrote in a new note to clients on Thursday.
Prior to earnings, Emanuel had written that themes like artificial intelligence could benefit companies on the micro level. And, in some cases, individual beats have been rewarded handsomely (see Netflix rising more than 16% Thursday on its price hikes and subscriber beat). But overall, the CBOE Volatility Index (^VIX), Wall Street’s favorite gauge for fear and volatility, is hovering near its highest levels in six months. And that has Emanuel concerned.
In Emanuel’s view, the VIX trading near 20 puts the index in a position to be “micro-driven” by things like AI and other investment themes. At 21, a level the index rose above on Thursday, Emanuel says market volatility becomes more driven by macro factors.
“Geopolitical risk (Include Ukraine/Russia and China) is arguably as high as it has been at any time, except 9/11, since before the 1989 Fall of the Berlin Wall,” Emanuel wrote.
While earnings can drive individual stocks, the broader market story hasn’t changed.
Treasury yields remain volatile, while the unknowns around the US economy’s trajectory, a boiling geopolitical feud in the Middle East, and lack of direction in Washington aren’t going away. Put together, the confluence of pressures isn’t a good recipe for markets that typically hate uncertainty.
Investors believe volatility in the bond market will end eventually, but a clearer picture of the Fed’s path forward must come first. Throughout a more than 30-minute speech and discussion on Thursday, Powell didn’t spell out if the Fed would hike once more or not.
“There wasn’t a clear message because he hedged his bets at every turn,” Kevin Nicholson, RiverFront Global Fixed Income chief investment officer, told Yahoo Finance Live on Thursday.
And until that narrative changes, the market regime doesn’t appear to be shifting either, even if earnings are beating expectations.
