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Stocks Battle Back from Early Pressure, Close out a Strong Month

U.S. stocks overcame early pressure and finished modestly higher, with the S&P 500 tacking onto its best monthly rally since November 2020. The markets showed some resiliency in the face of disappointing earnings from Dow member Apple and Amazon that showed how broad the labor, supply, and inflation challenges are. Q3 earnings season has been stronger than expected to help foster the solid monthly gain. In other earnings news, Dow component Chevron topped earnings estimates, while Starbucks saw pressure on its mixed results and guidance. In economic news, personal income fell more than expected but personal spending rose, while consumer sentiment was unexpectedly revised higher and Chicago manufacturing growth surprisingly accelerated. Treasuries finished higher to apply some pressure on yields after the yield curve flattened noticeably this week and the U.S. dollar bounced after yesterday's decline. Crude oil prices turned higher late in the day and gold fell. Europe and Asia finished mixed as the global markets grappled with monetary policies and the aforementioned challenges facing business activity.

The Dow Jones Industrial Average rose 89 points (0.3%) to 35,820, the S&P 500 Index increased 9 points (0.2%) to 4,605, and the Nasdaq Composite gained 50 points (0.3%) to 15,498. In moderately-heavy volume, 1.1 billion shares were traded on the NYSE and 5.2 billion shares changed hands on the Nasdaq. WTI crude oil increased $0.76 to $83.57 per barrel. Elsewhere, the gold spot price dropped $18.60 to $1,784.00 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—jumped 0.8% to 94.14. Markets were higher for the week, as the DJIA gained 0.4%, the S&P 500 increased 1.3%, and the Nasdaq Composite advanced 2.7%. The markets posted sharp gains for October, with the DJIA rallying 5.8%, the S&P 500 jumping 6.9%, and the Nasdaq Composite surging 7.3%.

Dow member Apple Inc. (AAPL $150) reported fiscal Q4 earnings-per-share (EPS) of $1.24, matching the FactSet consensus estimate, as revenues grew 28.8% year-over-year (y/y) to $83.4 billion, south of the Street's forecast of $85.1 billion. Sales of iPhone and iPad, along with wearables, home and accessories, at the company all came in below estimates, while its Mac and services revenues topped expectations. The company said it had a very strong performance despite larger-than-expected supply constraints, which it estimates to be around $6.0 billion. AAPL noted that the supply constraints were driven by industry wide chip shortages and COVID-related manufacturing disruptions in Southeast Asia. The company added that it expects solid y/y revenue growth in the December quarter despite that fact that it expects to face worse supply constraints but the COVID-related manufacturing disruptions have improved greatly though chip shortages linger on. Shares were solidly lower.

Amazon (AMZN $3,372) posted Q3 EPS of $6.12, well below the expected $8.90, with revenues rising 15.0% y/y to $110.8 billion, below the forecasted $111.6 billion. AMZN issued Q4 revenue and operating income guidance that came in below estimates, noting that it expects to incur several billion dollars of additional costs in its consumer business as it manages through labor supply shortages, increased wage costs, global supply chain issues, and increased freight and shipping costs, all while doing whatever it takes to minimize the impact on customers and selling partners this holiday season. Shares saw solid pressure.

Dow component Chevron Corporation (CVX $114) announced adjusted Q3 earnings of $2.96 per share, above the expected $2.20, with revenues jumping 77.3% y/y to $42.6 billion, north of the estimated $40.0 billion. The company said its free cash flow during the quarter was the best ever reported and its earnings were the highest since Q1 2013, largely due to improved market conditions, strong operational performance and a lower cost structure. Shares were higher.

Starbucks Corporation (SBUX $106) reported fiscal Q4 EPS of $1.00, just above the $0.99 expectation, as revenues rose 31.0% y/y to $8.1 billion, below forecasts calling for $8.2 billion. Q4 same-store sales rose 17.0% y/y, missing the forecasted 18.3% gain and the company's guidance. The company noted that North American sales grew solidly driven by increased same-store sales and average ticket size, though its sales in China declined due to decreases in average ticket and transactions. SBUX added that the pricing in North America was partially offset by increased supply chain costs due to inflationary pressures. The company issued full-year 2022 revenue guidance that was above estimates but its EPS outlook came in a bit shy of projections. SBUX traded solidly lower.

Q3 earnings season reached a fever pitch this week and led to strong weekly and monthly gains for the major indices. Per data compiled by Bloomberg, of the 279 S&P 500 companies that have reported thus far, roughly 67% have topped revenue forecasts and nearly 82% have bested profit projections. Compared to last year, sales growth has been approximately 18% higher and earnings are up about 39%. The major theme evolving during earnings season is that demand has remained strong but supply chain and labor shortage issues have constrained revenues.

For now, profit margins are holding up as companies have been able to offset some of the higher input costs associated with rising inflation pressures through higher prices that consumers appear willing to accept at the moment due to their healthy discretionary spending capability, high savings and growing household net worth. The question going forward for the markets is weather the supply chain challenges will just defer sales or will demand destruction occur if they persist longer than expected.

For the week, the heavyweight Consumer Discretionary, Communications Services and Information Technology sectors were among the best performers, bolstered by upbeat earnings reports from Google parent Alphabet Inc. (GOOGL $2,961), Microsoft Corporation (MSFT $332), and Dow member McDonald's Corporation (MCD $246). However the flattening of the yield curve and slight cooldown in crude oil prices hamstrung Financials and Energy issues, which underperformed.

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.

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

Personal income and spending mixed, October consumer sentiment revised higher

Personal income (chart) fell 1.0% month-over-month (m/m) in September, versus the Bloomberg consensus forecast of a 0.3% decline and following August's unrevised 0.2% gain. Personal spending rose 0.6%, matching estimates and compared to the prior month's upwardly-adjusted 1.0% increase. The September savings rate as a percentage of disposable income was 7.5%.

The PCE Deflator rose 0.3% m/m, in line with expectations and August's downwardly-adjusted increase. Compared to last year, the deflator was 4.4% higher, matching estimates and north of the prior month's downwardly-revised 4.2% increase. Excluding food and energy, the PCE Core Price Index rose 0.2% m/m, matching expectations, and compared to August's unadjusted 0.3% rise. The index was 3.6% higher y/y, below estimates of a 3.7% gain, and matching August's unadjusted rise.

The October final University of Michigan Consumer Sentiment Index (chart) was surprisingly revised higher to 71.7, compared to expectations for it to be unadjusted at the preliminary reading of 71.4. The upward revision came as a positive adjustment for the expectations component of the survey more than offset a downward revision to the current conditions portion. However, the overall index was lower versus September's 72.8 level, as sentiment regarding both expectations and current conditions deteriorated m/m. The 1-year inflation forecast rose to 4.8% from September's 4.6% rate, but the 5-10 year inflation forecast dipped to 2.9% from the 3.0% level in the prior month.

The Chicago PMI surprisingly moved further into a level depicting expansion (a reading above 50). The index rose to 68.4 in October from September's 64.7 reading, versus estimates calling for a decrease to 63.7. The unexpected improvement came as growth in new orders and employment accelerated, while production expansion slowed, supplier delivery times increased and prices paid continued to accelerate at a high rate.

The Q3 Employment Cost Index increased 1.3% quarter-over-quarter (q/q), above estimates calling for a 0.9% rise, and compared to Q2's unadjusted 0.7% rise.

In his latest article, Will Services Offset Weakness in Manufacturing? Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, talks about how services make up a larger portion of the global economy than manufacturing and have been sustaining the economic, jobs, and earnings outlook despite a slowdown in manufacturing due to well-publicized supply problems. However, corporate earnings are more dependent on manufacturing companies, and if the slowdown were to deepen or linger longer than expected, it could pose a risk to stocks more than the economy or jobs.

Treasuries were higher, with the yields on the 2-year note and the 30-year bond declining 3 basis points (bps) to 0.47% and 1.93%, respectively, while the yield on the 10-year note decreased 2 bps to 1.54%.

The Treasury yield curve has flattened noticeably 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.

Next week a fully-loaded economic calendar will join the ramped up earnings season to give the markets plenty to chew on. ISM and Markit will deliver their Manufacturing and Services PMIs for October, which will be followed by jobless claims for the week ended October 30 and the September trade balance. However, the two key economic reports/events will likely be the midweek Fed monetary policy decision and Friday's October nonfarm payroll report. October employment growth is expected to accelerate to a 400,000 gain following September's disappointing 194,000 rise and the unemployment rate is expected to dip to 4.7% from 4.8%. Meanwhile, the Fed is highly expected to announce plans to begin tapering its monthly asset purchases and the accompanying press conference by Chairman Jerome Powell will likely garner heightened scrutiny as the markets look for details regarding the timing, size and scope of the tapering campaign.

Europe and Asia mixed amid U.S. earnings disappointments and economic data

European equities finished mixed amid another busy day of earnings reports, while bond yields in the U.K. and Eurozone continued a recent sharp upside run. Financials traded higher amid the rise in yields but Energy issues modestly extended a recent soft patch, with crude oil prices trimming a surge as of late. Technology issues finished lower to weigh on the markets on the heels of the disappointing earnings results from Apple and Amazon last night that illustrated the broad impact of the labor, supply and inflation pressures. The euro and British pound gave back yesterday's counterintuitive gains that came despite European Central Bank President Christine Lagarde pushing back at rising market expectations for interest rate hikes. Expectations have risen that global central banks may have to begin tightening monetary policy in the face of rising inflation pressures and today, the Eurozone reported a much hotter-than-expected estimate for consumer price inflation for October. Schwab's Jeffrey Kleintop offers his 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.

The U.K. FTSE 100 Index was down 0.2%, Germany's DAX Index and Italy's FTSE MIB Index dipped 0.1%, France's CAC-40 Index and Spain's IBEX 35 Index rose 0.4%, and Switzerland's Swiss Market Index declined 0.4%.

Next week's international economic calendar will be dominated by a host October Manufacturing and Services PMIs, notably out of China, Japan, the Eurozone and U.K., as well as monetary policy decisions from the Reserve Bank of Australia and the Bank of England. Other reports that could foster some market reactions include: Japan's household spending, and Eurozone retail sales, along with German factory orders and industrial production.

Stocks in Asia finished mixed to end the week with the markets digesting a plethora of earnings and economic data, while continuing to grapple with supply-chain disruptions and uncertainty regarding the path of global monetary policies. Technology and Consumer Discretionary issues were in focus following the noticeable misses by Appleand Amazon in the U.S. late yesterday, which appeared to hammer home the negative impacts of labor, supply, and inflation challenges. In economic news, Japan's preliminary September industrial production fell more than expected and Tokyo consumer price inflation came in cooler than expected for October, while South Korea's industrial production fell unexpectedly in September and Australia's retail sales rose more than expected for last month.

Japan's Nikkei 225 Index gained 0.3% with the yen holding steady, continuing the volatility seen 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 rose 0.8% and the Hong Kong Hang Seng Index declined 0.7%. Meanwhile, South Korea's Kospi Index fell 1.3% and Australia's S&P/ASX 200 Index dropped 1.4%. India's BSE Sensex 30 Index decreased 1.1%, continuing yesterday's slide from record highs.

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