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  • Ida Abrego

Stocks Rose in Final Trading Session of the Week

U.S. equities ended the day higher and the week mostly lower in a choppy trading session as investors digested mixed corporate results and some disappointing economic data. Earnings were in focus with the season coming to a close, as Applied Materials handily beat the Street's forecasts and upped its guidance, Gap posted a profit on the back of a tax benefit, making it unclear if it is comparable to forecasts, and Williams-Sonoma saw record earnings growth but fell short of predictions. Economic reports were lackluster, as existing home sales slumped amid the persistent rise in interest rates, and the Leading Economic Index tumbled double what was expected. Treasury yields rose following the economic data, as did the U.S. dollar, while crude oil and gold prices declined. European stocks were higher despite geopolitical tensions remaining and as the markets continued to digest the U.K. budget announcement. Markets in Asia finished out a volatile week mixed in a quiet trading session.

The Dow Jones Industrial Average rose 199 points (0.6%) to 33,746, the S&P 500 Index went up 19 points (0.5%) to 3,965, and the Nasdaq Composite increased 1 point to 11,146. In moderate volume, 3.9 billion shares of NYSE-listed stocks were traded, and 4.0 billion shares changed hands on the Nasdaq. WTI crude oil lost $1.29 to $80.11 per barrel. Elsewhere, the gold spot price went down $12.70 to $1,750.30 per ounce, and the Dollar Index gained 0.3% to 106.97. Markets ended mostly lower for the week, as the S&P 500 declined 0.7%, and the Nasdaq Composite decreased 1.6%, while the DJIA was unchanged.

Applied Materials Inc. (AMAT $105) reported adjusted fiscal Q4 earnings-per-share (EPS) of $2.03, trouncing the $1.73 FactSet estimate, as revenues rose 10.2% year-over-year (y/y) to $6.75 billion, ahead of the anticipated $6.45 billion. The supplier of equipment, services, and software to manufacture semiconductors said that while it is slowing the rate of spending growth in the near term amid geopolitical and macroeconomic challenges, it is making the strategic investments for the future. President and Chief Executive Officer (CEO) Gary Dickerson said AMAT "delivered a strong finish to our fiscal year with record performance, and we remain focused on mitigating supply chain constraints and doing everything possible to meet customer demand." As such, AMAT upped its fiscal Q1 EPS guidance to a range of $1.75 to $2.11 and revenues of $6.3 billion to $7.1 billion. Shares were slightly higher.

Gap Inc. (GPS $14) reported adjusted Q3 EPS of $0.71, which includes an adjusted income tax benefit of $0.33 per share, which makes it unclear if it is comparable to the FactSet estimate of breakeven. Revenues nudged 2.4% higher y/y to $4.04 billion, compared to the Street's forecast for $3.82 billion. The apparel retailer—that offers Banana Republic and Athleta in addition to its namesake brand—said while it has made strides in reducing its swollen inventory, it will continue to be prudent in light of an uncertain consumer and a heavily promotional environment for the remainder of 2022. GPS traded higher.

Williams-Sonoma Inc. (WSM $122) posted a Q3 profit of $3.72 per share, a penny short of the FactSet estimate, as revenues rose 7.1% y/y to $2.19 billion, above the $2.15 billion Steet expectation. The company said it saw record EPS growth of 12% over last year, reflecting the continuation of its order fulfillment, strong profit margins, and disciplined cost control. WSM reaffirmed its full-year 2022 guidance of revenue growth in the mid-to-high single digits and operating margins nearly in line with 2021 figures. However, citing the macro uncertainty, it will not provide an update to its outlook for fiscal 2023 and beyond until its press release announcing its Q4 results. Shares of WSM fell.

Q3 earnings season is headed down the home stretch, as several prominent retailers are adding the finishing touches. Schwab's Chief Investment Strategist Liz Ann Sonders discusses in her article, Disappearing Act: Earnings, how earnings weakness is starting to materialize across a broader swath of industries, with hits coming from a strong dollar, weaker demand, and aggressive monetary policy. You can follow Liz Ann on Twitter: @LizAnnSonders. Additionally, Schwab's Chief Global Investment Strategist Jeffrey Kleintop, CFA, notes in his article, The End of Earnings Growth? how the earnings outlook is dimming as the economy slows, which could result in cuts to earnings forecasts and downside for stocks. However, Jeff points out that U.K. earnings have been a surprising outperformer. You can follow Jeff on Twitter: @JeffreyKleintop. Read all of our market commentary on our Insights & Education page, and you can follow us on Twitter at @SchwabResearch.

Leading Index tumbles, more disappointing housing data

Existing home sales were down 5.9% month-over-month (m/m) in October to an annual rate of 4.43 million units, slightly better than the Bloomberg consensus estimate of a 4.38 million-unit pace, while September's figure was adjusted slightly lower to 4.69 million units. Contract closings fell for the ninth-straight month, and remain at the lowest level since May 2020 and are down 28.4% versus a year ago. Sales m/m across the four major regions were all lower.

The median existing home price was up 6.6% from a year ago at $379,100—marking the 128th straight y/y gain—but was the fourth month in a row that the median sales price decelerated from the record high of $413,800 in June. The number of homes for sale increased for a third month in a row, with unsold inventory at a 3.2 month's supply at the current sales pace and up from the 2.4 months pace in the same period last year. National Association of Realtors Chief Economist Lawrence Yun said, "More potential homebuyers were squeezed out from qualifying for a mortgage in October as mortgage rates climbed higher," adding, "The impact is greater in expensive areas of the country and in markets that witnessed significant home price gains in recent years. He went on to say, "Inventory levels are still tight, which is why some homes for sale are still receiving multiple offers," and that "In October, 24% of homes received over the asking price. Conversely, homes sitting on the market for more than 120 days saw prices reduced by an average of 15.8%."

The Conference Board's Leading Economic Index (LEI) for October fell 0.8% m/m, far more than estimates calling for a 0.4% decline, and compared to September's negatively revised 0.5% fall. The index recorded its eighth consecutive monthly loss.

Treasury yields were higher, as the yield on the 2-year note rose 6 basis points (bps) to 4.51%, the yield on the 10-year note gained 4 bps to 3.82%, and the 30-year bond rate increased 3 bps to 3.92%.

Market volatility has continued this week amid the release of the rest of the October inflation picture, as stocks have been unable to add to last week's rally that came in the wake of the softer-than-expected Consumer Price Index (CPI) data. Liz Ann discusses in her latest article, Swing, Swing: Wild Week, how a better-than-expected October CPI report provided some relief and support for equities, but investors should be wary of low-quality leadership and, to some extent, crypto stress.

Inflation has been the driving factor behind the aggressive monetary policy from the Federal Reserve. The increase in bond yields and this year's rally in the U.S. dollar have fostered the choppiness in the markets. Schwab's Chief Fixed Income Strategist Kathy Jones discusses the bond and currency markets in her article, Markets to Fed: Slow Down, You Move Too Fast, noting how if these trends continue, the Fed may end up slowing its pace of tightening—but not stopping it. You can follow Kathy on Twitter: @KathyJones.

Europe higher with geopolitical tensions and U.K. budget remaining in focus

Stocks in Europe traded higher as investors assessed the week's data and its implications for interest rates going forward. Recent lower-than-expected U.S. consumer and wholesale price reports have increased optimism that central banks, led by the Fed in the U.S., may be able to temper the aggressiveness in their rate-hike campaigns. The relentless rise in prices has been a key driver in the aggressive Bank of England (BoE) monetary actions, as well as across the globe. However, Jeffrey Kleintop discusses in his latest article, Central Banks Stepping Down, how central banks seem to be stepping down from aggressive rate hikes, and this could lead to a year-end "Santa Pause" rally for stocks.

Investors continued to sort through the U.K.'s recently-released budget. The U.K. government's £55 billion ($66 billion) sweeping fiscal plan includes tax hikes and spending cuts—steps in direct contrast to the proposal presented in September that rocked the markets, particularly bonds and currencies. The financial plan comes as the country teeters on the brink of a recession and as the BoE remains committed to its monetary policy in order to combat persistent inflation. Meanwhile, geopolitical tensions remain in the wake of a missile landing in NATO-member Poland, killing two people who lived near the border. NATO ambassadors held an emergency meeting on the matter, concluding that the ordinance was likely a Ukrainian air defense missile and not one fired from Russia. In light economic news in the region, retail sales in the U.K. fell, but at a slower pace than expected. The euro declined versus the U.S. dollar, and the British pound was higher. Bond yields in the Eurozone fell, while rates in the U.K. gained ground.

The U.K. FTSE 100 Index increased 0.5%, France's CAC-40 Index was up 1.0%, Switzerland's Swiss Market Index and Germany's DAX Index advanced 1.2%, Spain's IBEX 35 Index rose 1.1%, and Italy's FTSE MIB Index climbed 1.4%.

Asia mixed to close out week

Stocks in Asia finished out a bumpy week mixed in a quiet trading session. Mainland Chinese and Hong Kong stocks have paused a recent rally that came as China made some moves to ease COVID restrictions and support its economy, which has led to some optimistic sentiment and boosted property and tech stocks in the region. Hopes of the Asian nation curbing or bringing the nation’s lockdown policy to a close have been of keen interest, as the country continues to try to stabilize its economy that has been hampered by COVID-induced lockdowns and has said it will take a more "targeted" response to the latest rise of infections.

Investors also continued to absorb the slew of inflation data being released, with Japan reporting that nationwide consumer prices rose 3.5% y/y, slightly above estimates and its highest level in 40 years. The persistent rise in prices has been a main factor in the aggressive measure taken by central banks across the world, led by the Fed, as well as the Reserve Bank of Australia’s (RBA) decision to raise interest rates for a second-straight meeting. In the minutes from its November meeting this week, RBA members gave arguments in favor of either a 25 bp or 50 bp rate hike this month. While they did not rule out returning to larger increases, the medium-term inflation expectations did remain consistent with inflation returning to target, and members said they saw value in tightening in a consistent manner.

Japan's Nikkei 225 Index ticked 0.1% lower, with the yen gaining ground versus the U.S. dollar. China's Shanghai Composite Index declined 0.6%, the Hong Kong Hang Seng Index lost 0.3%, and India's S&P BSE Sensex 30 Index decreased 0.1%. Meanwhile, South Korea's Kospi Index nudged 0.1% higher, and Australia's S&P/ASX 200 Index gained 0.2%.

Markets unable to carry over last week's momentum

The U.S. markets posted losses for the week, failing to keep last week's positive energy that came in the wake of the upbeat consumer price inflation report. The October inflation picture came into full focus this week, with a cooler-than-expected Producer Price Index (PPI) and a small decline in the Import Price Index, keeping hopes alive that the Fed may not have to be as aggressive moving forward. However, some hawkish commentary from Fed officials throughout the week threw some cold water on that notion, preserving the economic uncertainty. As noted in the latest Schwab Market Perspective: Stress Cracks, as the Fed continues to ratchet up the pressure with higher interest rates, cracks are beginning to appear beneath the surface of the U.S. economy. Meanwhile, earnings season moved into its final acts, with a number of retail heavyweights offering mixed results and solidifying worries of a lackluster holiday shopping period.

Next week will be shortened by the Thanksgiving holiday, as all U.S. markets will be closed on Thursday and trade in an abbreviated session on Friday. As such, the economic calendar will be somewhat light, but it will still hold some key reports that could shape market action. The week will start off slow, with the docket empty until a read on regional manufacturing activity in the Richmond region on Tuesday. Wednesday will shoulder the bulk of the week's data, with reports slated for release to include a preliminary look at durable goods orders, initial jobless claims for the week ended November 19, November manufacturing and services PMIs from S&P Global, new home sales, the preliminary University of Michigan Consumer Sentiment Index for this month, as well as the minutes from the Federal Open Market Committee's November monetary policy meeting.

Overseas, the economic calendar will be sparse next week, but there are a number of reports slated for release that may garner attention, headlined by a host of manufacturing and services PMIs from across the globe. As well, Japan will release employment data, its Leading Index, department store sales, as well as consumer price figures. In the Eurozone, consumer confidence is on deck, while Germany will offer PPI, import prices, the Ifo Business Climate Index, consumer confidence, and Q3 GDP. Finally, the U.K. will post public sector net borrowing.


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