The S&P 500 Holds Its Ground Despite Wild Treasury Moves

The stock market managed to stop a four-day decline, despite renewed turbulence in Treasury bonds. Investors were eagerly anticipating earnings reports from major tech companies. Oil and gold prices dropped as it seemed that Israel might delay a broader ground invasion in Gaza.

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In the first 15 minutes of Wall Street trading, the S&P 500 initially fell by almost 1%. However, it later rebounded and surpassed the 4,200 level, which is considered a crucial technical support point and signifies a 50% recovery from the lows experienced during the banking crisis in March. Equities also gained ground as the yields on Treasury 10-year bonds decreased, having briefly touched 5% for the first time since 2007.

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The world's largest bond market has experienced significant volatility due to expectations that the Federal Reserve will maintain high-interest rates and that the government will increase bond sales to cover expanding deficits. Yields haven't been this elevated since the period preceding the Federal Reserve's use of unconventional measures, such as near-zero benchmark rates and quantitative easing, to stabilize an economy shaken by the sub-prime mortgage crisis and the Lehman Brothers collapse.

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Sam Stovall, the chief investment strategist at CFRA, noted, "Given the uncertainty surrounding the peak level for the 10-year yield, the US equity market is likely to remain under pressure because breadth and relative strength indicators have yet to reach extreme levels. Consequently, one thing is certain: October will only add to its reputation as the most volatile month of the year."

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Billionaire investor Bill Ackman disclosed that he had closed his short position on US Treasuries, stating that "the world is facing too many risks to maintain a short position in bonds at the current long-term interest rates."

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Morgan Stanley's Michael Wilson mentioned that the likelihood of a year-end rally in US stocks was diminishing as investors confronted numerous risks, including high profit estimates and the Federal Reserve's tightening of policies. He added that he wouldn't be surprised to see further declines in the S&P 500, given that earnings expectations for the fourth quarter and 2024 appear too optimistic, and policy tightening is expected to impact both monetary and fiscal aspects.

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Data showed that about one-fifth of S&P 500 companies that had reported earnings had their stocks underperform the benchmark index by a median of 3.7% on the day of results when they missed analysts' earnings-per-share estimates. This is the worst performance in the data's history dating back to the second quarter of 2019.

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Lori Calvasina, the head of US equity strategy at RBC Capital Markets, commented, "October can be a challenging month for stocks, but more often than not, it tends to see the S&P 500 rise. Unfortunately, as of mid-October 2023, US equities are still in a precarious position." Calvasina noted that her firm's cross-asset models indicated that the case for US equities compared to bonds had worsened, and earnings revisions trends had turned slightly negative for the S&P 500 after briefly entering positive territory. Additionally, the sentiment model had pulled back significantly but had not yet reached levels suggesting that US equities were oversold.

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