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Stocks in tow of the Fed. Not helped by a solid start to earnings season

October 23, 2023

Stock markets, not only in the US, are going through a difficult period. The main index of the New York Stock Exchange, the S&P 500, has written off over three per cent in the past week, and other Wall Street indices have also entered negative territory. Investors are not persuaded to make major purchases even by the solid results of companies for the third quarter. They are counteracted by statements by US central bank officials, who suggest that the likelihood of further interest rate rises is growing.

 Stocks in tow of the Fed. Not helped by a solid start to earnings season

US companies have begun earnings season, during which they report their third quarter results. Even though the results are beating expectations in many cases, it is not helping stocks. The main index of the New York Stock Exchange, the S&P 500, lost more than three per cent of its value last week, and other indices also closed the week's trading in the red.* Negative market sentiment is also prevailing in European and Asian markets.[1],[2]

Increasing hawkish rhetoric from the US Federal Reserve seems to be to be blamed. Its officials, led by Governor Jerome Powell, are increasingly suggesting that the next monetary policy meeting could see another interest rate hike. [1]

"Evidence is gathering that we are permanently above trend growth or that labor market tensions are not abating. All of this could lead to continued high inflation, which raises the risk of further monetary tightening," Jerome Powell saidduring a speech at the Economic Club of New York on Thursday.

Expectations of further interest rate hikes by the Fed are pushing up demand for government bonds. The interest rate on the 10-year U.S. government bond hit its highest level since 2007, trading around 4.8 percent last week.

It is bond yields that represent one of the biggest problems in the stock markets nowadays. However, many experts believed that it was the significantly better-than-expected results of companies traded on stock exchanges that could help stocks grow. But, as already mentioned, this was not the case.

How significantly the Federal Reserve raises interest rates will be important and will determine the direction going forward. It will depend on whether the increase is in line with expectations or whether it brings a negative surprise. Therefore, it will also depend on what expectations Fed officials manage to create among investors.

If the markets' expectations are brought into line with the Fed's actual monetary policy, the fundamental factors that influence financial markets will regain importance. It can therefore be assumed that the current negative mood on the markets is mainly short-term in nature and that it is the fundamentals that will ultimately prevail. [2] Unless another negative event occurs. The fact is that the escalating conflict between Israel and the terrorist movement Hamas, which controls the Gaza Strip, is not easing the situation.

* Past performance is no guarantee of future results.

[1,2] Forward-looking statements are based on assumptions and current expectations, which may be inaccurate, or on the current economic environment, which may change. Such statements are not guarantees of future performance. They involve risks and other uncertainties that are difficult to predict. Results may differ materially from those expressed or implied by any forward-looking statements.


[1] https://www.investing.com/indices/stoxx-600

[2] https://www.investing.com/indices/hang-sen-40

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