The Fed could lay the groundwork for a year-end rally in the week ahead
Stocks are set to exit October with a tail wind but will immediately face a Federal Reserve meeting in the first days of November that could help decide the course of trading for the rest of the year. The Fed is widely expected to raise its target fed funds rate by three-quarters of a point Wednesday, but it's what central bankers signal about December and later that will matter most. Some economists expect that by the mid-December meeting, the central bank will be ready to scale back the size of its rate hiking to a half percentage point, or 50 basis points. There also is plenty of economic data in the week ahead, the most important being Friday's September employment report. In addition, the coming week also is the busiest of the corporate earnings season, with about a third of the S & P 500 companies releasing results. "The key is Nov. 2 and what the Fed has to say," said Quincy Krosby, chief global strategist at LPL Financial. She said policymakers like San Francisco Fed President Mary Daly have suggested the central bank could slow the pace of rate hikes at some point, and many market participants are now expecting that to happen in December. "The market is looking for either an outright comment or clues, either in the statement or in the press conference. ... That's going to be important," Krosby said. "Historically, the market waits for the last Fed rate hike to be introduced and then the market climbs higher. The question is, with the backdrop we have ... does the market wait for that last rate hike or does the market use the transition to a less hawkish policy to start investment?" As investors have become more convinced the Fed could slow down, stocks have rallied and bond yields have fallen. Yields fall when bond prices rise, and the closely watched 10-year yield was at 4.01% Friday afternoon from its recent high of 4.32% the previous Friday. Patrick Palfrey, senior U.S. equities strategist at Credit Suisse, said the Fed may not signal on Wednesday that it will step back from its aggressive policy, no matter what investors currently expect. "The question for the Fed is how do they balance the incremental slowdown we've seen in inflation against a still roaring economy," he said. "At the end of the day, in order to tame inflation, the Fed is going to have to remain engaged." Keith Lerner, chief market strategist at Truist, said the rate hike decision could have a big impact on how the market trades during a typically positive time for stocks. "You're thinking about the biggest driver for the market this year. It's been aggressive central bank tightening," he said. 'Tis the Season For stocks, historically, the home stretch into the year-end in a midterm election year has been a time of rising tides. The Dow Jones Industrial Average was up 14.4% for October so far, on its way to ending the month Monday with its best monthly gain since 1976. The S & P 500 was up more than 8.8% for the month. The Dow was up 5.7% on the week, the S & P 500 gained 5.7% and the Nasdaq Composite was up 2.2%. But even if the final months of 2022 are positive for stocks, Lerner expects gains to be limited. On Friday, he switched his view from neutral to less attractive for equities. He said there could be more upside for stocks, but he expects the S & P 500 to peak at about 4,100 to 4,150 over the next three to six months, suggesting a gain of about 5% to 6.5% from the current level. "There's going to be a ton of fundamental and technical resistance right there," he said. He said there is also the chance of a recession on the horizon. But for now, "You have the seasonals. You still have investors that are underweight, and now you're getting a little bit of momentum as we're trying again to move above the 50-day moving average," he said. The 50-day moving average is 3,841 for the S & P 500, and it was well above that Friday afternoon for the second time in the past week. The S & P closed Friday at 3,901. "We think there are challenges ahead, and there might be momentum that moves you higher, but in our view the risk-reward is not that favorable," Lerner said. Palfrey said earnings so far this quarter have been better than expected, despite the high-profile misses and weak forecasts from Big Tech names like Amazon , Meta Platforms and Alphabet. "I think at the end of the day we continue to believe [investors should] remain focused on assets that benefit from inflation," he said. "Whether it's hard-dollar assets or commodities or sectors that have inflation beneficiaries." Those sectors have done better recently than tech and communication services. The earnings season has revealed a bifurcation that is also playing out in stock prices. For instance, energy has been the best performer in October, up nearly 24%, followed by industrials, up about 14%. Tech gained about 9%, while communications services, which includes Meta and Alphabet, was up less than 1%. "By and large, [with] the earnings backdrop this season we're much better than most investors feared," said Palfrey. "And the conversations that we're imminently headed into a recession have by and large dropped from my day-to-day conversations with clients." LPL strategist Krosby said the upcoming midterm elections may be one factor at play in the market. "Based on the sectors that are doing well, it looks like the market is sniffing out a Republican win," she said. Stocks that would benefit from Republican control of Congress, or just gridlock, include energy, health care, industrials and defense. Week ahead calendar Monday Earnings: Lattice Semiconductor, NXP Semiconductor, Aflac, Avis Budget, Stryker, Rambus, IMAX, Leggett and Platt, Goodyear Tire, ON Semiconductor, XPO Logistics , PriceSmart, Marriott Vacations, American Water Works, Vornado Realty, Loews 9:45 a.m. Chicago PMI Tuesday Earnings: Advanced Micro Devices, Pfizer, Eli Lilly, Airbnb , Uber, Clorox , Electronic Arts, Cirrus Logic, Public Storage, Denny's, Devon Energy , Edison International, Extra Space Storage, Mondelez , Caesars Entertainment, Simon Property Group, Fox Corp., Toyota, BP, Sony, Gartner, Marathon Petroleum , Yum China, Owens-Illinois, Genworth, Assurant, Chesapeake Energy, Liberty Global, Cheesecake Factory, Healthpeak Properties, Prudential Financial, McKesson, Match Group Federal Reserve begins two-day meeting Vehicle sales 9:45 a.m. S & P Global Manufacturing PMI 10:00 a.m. ISM manufacturing 10:00 a.m. Construction spending 10:00 a.m. JOLTS Wednesday Earnings: Qualcomm, Booking Holdings, CVS Health, Paramount Global, Etsy, eBay, Roku, Robinhood, NuSkin, Hostess Brands, Yum Brands, Humana, Glaxo SmithKline, Generac, Zimmer Biomet, Cedar Fair, Entergy, Estee Lauder, Tupperware , Apollo Global Management, The New York Times, Scotts Miracle-Gro, Steve Madden, Brinker International, ODP, Emerson Electric, Cognizant Technology , CH Robinson, MGM Resorts, CF Industries, Marathon Oil, Allstate, Transocean, MetLife, Suncor Energy , APA 8:15 a.m. ADP employment 10:00 a.m. Housing vacancies 2:00 p.m. Fed policy statement 2:30 p.m. Fed Chair Jerome Powell briefing Thursday Earning s: Amgen, PayPal , ConocoPhillips, Starbucks, DoorDash, Block, Marriott, Peloton, Amerisource Bergen, Shake Shack, Crocs, Datadog , Moderna, Teva, Zoetis, Barrick Gold, CyberArk Software , Bausch Health, Spirit AeroSystems, Kellogg, Intercontinental Exchange, Dropbox , Expedia, Allscripts Healthcare, Carvana , Viavi Solutions, Schrodinger, Murphy Oil, Tempur Sealy, AmerisourceBergen, Restaurant Brands, Regeneron Pharmaceutical , Cigna, Virtu Financial, Air Products, Ball Corp., Iron Mountain, Dun and Bradstreet, Hyatt Hotels, Cummins, Papa John's , GoDaddy, Lions Gate Entertainment, WW International, Twilio , GoPro, Illumina, Yelp, Rocket Companies, EOG 8:30 a.m. Initial jobless claims 8:30 a.m. International trade 8:30 a.m. Productivity and costs 9:45 a.m. Services PMI 10:00 a.m. ISM services 10:00 a.m. Factory orders Friday Earnings: Hershey, CBOE Global Markets, FuboTV, Liberty Broadband, DraftKings , Duke Energy, Fluor, AMC Networks , Cardinal Health 8:30 a.m. Employment report Saturday Earnings: Berkshire Hathaway