Schwab Market Update

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U.S. equities finished the final trading session of the week mixed, but managed to bring the winning streak of weekly gains to three, with both the S&P 500 and the Dow reaching new record high territory. Earnings season remained in full force, with Dow members American Express and Intel both beating earnings and revenue forecasts, while fellow Dow component Honeywell posted mixed results. Meanwhile, Chipotle reported strong quarterly figures, but shares of Snap plunged after it missed the Street's revenue forecasts. The economic calendar was light today, with October reads on preliminary manufacturing and services activity the lone releases, showing the continued impacts of supply chain bottlenecks, inflationary pressures, and labor shortages that have been persistent themes of late. Treasuries were mixed as the yield curve has flattened slightly and the U.S. dollar ticked lower, while crude oil prices and gold gained ground. Europe finished mostly higher amid some upbeat economic data, while markets in Asia were mixed.

The Dow Jones Industrial Average gained 74 points (0.2%) to 35,677, while the S&P 500 Index declined 5 points (0.1%) to 4,545, and the Nasdaq Composite lost 125 points (0.8%) to 15,090. In moderate volume, 763 million shares were traded on the NYSE and 5.6 billion shares changed hands on the Nasdaq. WTI crude oil rose $1.26 to $83.76 per barrel. Elsewhere, the gold spot price advanced $13.00 to $1,794.90 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.2% lower to 93.62. Markets were higher for a third consecutive week, as the DJIA gained 1.1%, the S&P 500 increased 1.7%, and the Nasdaq Composite advanced 1.3%.

Dow member Honeywell International Inc. (HON $217) reported adjusted Q3 earnings-per-share (EPS) of $2.02, north of the FactSet estimate of $1.99, with revenues rising 8.7% year-over-year (y/y) to $8.47 billion, south of the Street's forecast of $8.66 billion. Organic sales were up 8%, as sales in all four of the company's segments grew, led by the aerospace segment. The company said, "Our disciplined approach to productivity and pricing helped deliver a strong third quarter despite an uncertain global environment marked by supply chain constraints, increasing raw material inflation, and labor market shortages." Shares were lower.

Dow member American Express Company (AXP $187) reported adjusted Q3 EPS of $2.27, topping the $1.80 estimate, with revenues rising 24.9% y/y to $10.93 billion, above the Street's forecast of $10.52 billion. The payments company saw card member spending accelerate from the previous quarter, led by consumer and small business spending on goods and services, while it also saw a rebound in travel and entertainment spending, with restaurant spending growing above pre-pandemic levels. AXP finished higher.

Dow member Intel Corporation (INTC $49) reported adjusted Q3 EPS of $1.71, topping the $1.11 estimate, with revenues declining 4.7% y/y to $19.19 billion, topping the Street's forecast of $18.24 billion. INTC noted the high demand for semiconductors where it believes it's in a position to lead. In management news, the company announced the CFO is retiring in 2022. The company raised its full-year earnings guidance and reaffirmed its full-year revenue guidance. Shares dropped over 10%.

Chipotle Mexican Grill, Inc. (CMG $1,793) reported adjusted Q3 EPS of $7.02, topping the $6.32 estimate, with revenues increasing 21.9% y/y to $1.95 billion, just beating the Street's forecast of $1.94 billion. Same store sales increased 15.1% y/y, above estimates calling for a 14.0% increase, and the company opened 41 new restaurants in Q3. In addition, menu price increases helped to offset wage inflation and higher costs associated with beef and freight. CMG traded lower.

Snap, Inc. (SNAP $55) reported adjusted Q3 EPS of $0.17, topping the estimate calling for a $0.10 loss, with revenues increasing 57.3% y/y to $1.07 billion, below the Street's forecast of $1.10 billion. Daily active users increased 23% y/y. The company noted that it's experiencing significant headwinds, including changes to the iOS platform that impact the way they advertise as well as global supply chain issues and labor shortages. However, it believes it is now operating at a scale necessary to navigate those headwinds. Shares tumbled more than 25%.

Schwab's Chief Investment Strategist Liz Ann Sonders provides her latest commentary, The Beast of Burden of Inflation, discussing how the age of abundance has given way to an age of scarcity, while the pro-cyclical version of inflation may have given way to the counter-cyclical version.

Q3 earnings season has kicked into high gear, and although early, of the 117 S&P 500 companies that have reported thus far, roughly 67% have topped revenue forecasts and approximately 81% have bested profit projections. Compared to last year, sales growth has been nearly 16% higher and earnings are up about 46%.

Director and Senior Investment Strategist with the Schwab Center for Financial Research (SCFR), David Kastner, CFA, provides his latest Schwab Sector Insights: A View on 11 Equity Sectors, offering a look at what we expect to see over the next three to six months.

Find all our market commentary on our Market Insights page at www.schwab.com and follow us on Twitter at @SchwabResearch.

Manufacturing activity slows but services jumps

The preliminary Markit U.S. Manufacturing PMI Index for October declined to 59.2 from September's unrevised 60.7 figure but remained solidly in expansion territory as denoted by a reading above 50. Estimates called for the index to dip to 60.5. The preliminary Markit U.S. Services PMI Index showed growth (above 50) for the key U.S. sector accelerated more than expected, rising to 58.2 from August's 54.9 figure and compared to forecasts of a rise to 55.2.

When looking at the composite index of output from both sectors, Markit said, "Stronger sales placed further pressure on business capacity during October. The level of outstanding business rose at a series record pace, with respondents linking the latest rise with supply issues and a lack of staff." Markit also mentioned that companies stepped up their hiring efforts in October as employment increased at the fastest pace since June.

Treasuries were mixed, as the yield on the 2-year note was up 3 basis points (bps) at 0.47%, while the yield on the 10-year note was down 3 bps at 1.65%, and the 30-year bond rate was 4 bps lower at 2.09%.

Despite today's action, the Treasury yield curve has seen some steepening as of late, and Schwab's Chief Fixed Income Strategist, Kathy Jones notes in her latest article, Bond Market Blues: High Inflation and Low Yields, that coming into the fourth quarter, we were expecting a rise in yields and volatility. She points out how bond yields appeared to be too low in the face of rising inflation and investors too complacent about the potential for tighter monetary policy.

She adds that we continue to suggest keeping average duration low due to our expectation for yields to push higher as we see the potential for 10-year Treasury yields to move up to 1.75% this year and above 2.00% in the first half of next year. Kathy also discusses how over the next six to twelve months, we suggest investors look for opportunities to extend duration if yields move higher, as anticipated. "The early stages of rising yield cycles are usually characterized by rising longer-term rates and steepening yield curves. However, once the prospect of tighter policy is on the horizon, long-term yields have tended to peak well before the initial rate hike of the cycle," she adds.

Europe mostly higher with earnings in focus, Asia finished mixed

European equity markets were mostly higher to close out the week with the growth-oriented Information Technology sector leading the way, while the Energy sector was once again in the red in the wake of the ongoing energy crunch. Solid earnings in the region continued to roll in, but the economic calendar was heavily in focus, as key reads on Eurozone manufacturing came in better than expected and services activity decelerated more than forecasts, as persistent supply chain bottlenecks and inflationary pressures impacted the numbers. Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, offers his latest article, Inflation: Persistently Transitory, noting how persistently going from one transitory source of inflation to the next may keep inflation elevated for longer than markets currently anticipate. Meanwhile, retail sales out of the U.K. surprisingly declined on a m/m basis and fell more than expected compared to a year earlier. The euro was higher versus the U.S. dollar, and the British pound lost ground, while bond yields in the U.K. declined, but yields in Europe increased.

The U.K. FTSE 100 Index was up 0.2%, Germany's DAX Index increased 0.5%, France's CAC-40 Index rose 0.7%, Switzerland's Swiss Market Index ticked 0.1% higher, and Italy's FTSE MIB Index gained 0.2%, while Spain's IBEX 35 Index lost 0.4%.

Stocks in Asia finished mixed, as some property debt concerns out of China eased amid reports that the distressed property developer China Evergrande (EGRNY $8) is set to make a coupon payment and avoid default. Many of the same recent themes remained as the markets continued to wrestle with global supply chain bottlenecks and what that means for companies going forward and the resulting inflation from those challenges. Moreover, investors are still expecting global central banks to begin reigning in their extremely loose monetary policies before the end of the year. On the economic front, Japanese consumer prices came in right in line with expectations, while Hong Kong consumer prices were surprisingly well below expectations.

Japan's Nikkei 225 Index rose 0.3%, as the yen strengthened further. Japanese stocks have seen increased volatility after strong September and Q3 performances as discussed by Schwab's Jeffrey Kleintop in his article, It's All Over for Japan (and That's Good). China's Shanghai Composite Index lost 0.3%, the Hong Kong Hang Seng Index was up 0.4%, Australia's S&P/ASX 200 Index was 0.1% higher, South Korea's Kospi Index was nearly unchanged, and India's BSE Sensex 30 Index declined 0.2%.

October rebound continues

October continues to be an upbeat month for the U.S. equity markets, as the major indices registered a third-straight week of gains to further recover from the solid downturn in September. Q3 earnings season shifted into a high gear, with a number of Dow components posting solid quarterly results, which helped propel the S&P 500 and the Dow back into record high territory. The upbeat sentiment came despite a mixed bag of economic reports, with jobless claims moderating further to a level not seen since the beginning of the pandemic and still-robust manufacturing and services activity coming up against a disappointing industrial production report. Housing was in focus for the week, with homebuilder sentiment unexpectedly improving and existing home sales coming in stronger than forecasts, while housing starts and building permits fell short of expectations and mortgage applications dropped, courtesy of a rise in interest rates. Meanwhile, the Fed's Beige Book noted that economic growth continued at a moderate to modest pace, but most Districts reported significantly elevated prices, with supply-chain issues contributing to rising input costs.

The Treasury yield curve flattened noticeably as the short end saw rates jump, while the yields on the 10-year note and 30-year bond slid. The U.S. dollar dipped, further pulling back from a recent rally that took the greenback to levels not seen in more than a year. Crude oil prices remained in rally mode, rising for the ninth-straight week, and gold posted in its fourth-consecutive weekly gain. Most S&P 500 sectors were higher, led by Real Estate, Health Care, Financials and Utilities, while Communications Services was the lone sector to see red figures.

While Q3 earnings season will remain robust and likely command the lion's share of investors' attention, next week's economic calendar is still poised to deliver some data points that could move the markets. A host of regional manufacturing activity reports are slated for release, as well as durable goods orders, the first look (of three) at Q3 Gross Domestic Product (GDP), and personal income and spending. The psyche of the all-important consumer will be on display, courtesy of the Conference Board's Consumer Confidence report and the final read of the October University of Michigan Consumer Sentiment Index, while new home sales and pending home sales will put the finishing touches on September's housing picture.

Next week's international economic calendar is also primed to bring some reports that may contend for attention including: China—industrial profits. Japan—the Leading Index, industrial production, retail sales, and CPI. Australia—CPI, PPI, and retail sales. Eurozone—sentiment figures, CPI, GDP and the European Central Bank's monetary policy meeting, as well as German business sentiment, CPI, retail sales and employment data.

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