U.S. stocks traded lower in October, as the Nasdaq Composite ($NASX) and S&P 500 Index ($SPX) respectively fell 2.8% and 2.2% - extending their losing streaks to three months. While September held on to its reputation as the worst month for stocks, October also stuck close to the historical script, and we saw some heightened volatility.
While the Q3 earnings season has been a mixed bag so far, the rising geopolitical tensions in the Middle East pressured stocks in October. Also, the yield on the 10-year Treasury note hit 5% during the month for the first time since 2007, which took a toll on stocks – especially growth names.
In October, the S&P 500 slipped into correction territory, having fallen over 10% from its 2023 highs. However, traders might take heart in the fact that November has been the best month for stocks since 1950, and the S&P 500 has gained 1.7%, on average, during the month.
Stock Market Outlook for November
Here’s what could drive U.S. stocks in November as markets look to regain their footing:
1. Watch Out for Inflation and the Fed Meeting
The Fed will announce its policy decision today, and markets are almost unanimous that the U.S. central bank will hold rates steady. However, Chair Jerome Powell’s accompanying comments about the economy and the likely path of interest rates going forward are what markets will be watching. The Fed has been much more hawkish than what markets expected, and Powell has dashed hopes of an imminent pivot – or a transition to rate cuts – on multiple occasions.
Along with the Fed meeting, keep an eye on the inflation data set to be released later this month. The Consumer Price Index (CPI) increased 3.7% YoY in September, and while the metric has fallen sharply from its 2022 highs, inflation is still much higher than the 2% that the Fed targets.
2. Corporate Earnings
While we are past the peak earnings season, we'll get Apple’s (AAPL) earnings report tomorrow. The company’s earnings will shed more light on the health of consumer spending, especially after Amazon (AMZN) gave lower-than-expected guidance for the December quarter.
Later this month, retail companies will also step into the earnings confessional. Retail companies’ earnings should offer early insights into the holiday spending mood among U.S. consumers. In August, most retail companies sounded downbeat on the outlook - which led to weakness in not only their stock prices, but also in the wider markets.
3. Israel-Hamas War Could Spoil the Calculus
Any major escalation in the Israel-Hamas war could spoil the calculus for stocks - as the conflict might not only lead to higher energy prices, thereby dashing any hopes of rate cuts, but could also take a toll on global economic activity. Oil prices have whipsawed ever since the war began, but the contagion has so far been manageable - partially because of demand fears.
Incidentally, Meta Platforms (META) said during its Q3 earnings call that they have seen a slowdown in growth since the beginning of October, even as the company added that it could not be attributed to the war with certainty.
All things considered, I believe that after the recent pullback, U.S. stocks now look set for a year-end rally. First, despite all the rate hikes and geopolitical tensions, U.S. economic activity has held steady, and the near-imminent recession that many were forecasting hasn’t come to fruition – and the probability of it happening anytime soon looks low, as well.
Second, in all likelihood, the Fed should start cutting rates next year - and as we approach the year's end, markets will start factoring in 2024 expectations. On a related note, the profit recession looks over, and analysts are predicting an 11.9% rise in S&P 500 earnings in 2024. Notably, S&P 500 earnings have contracted in all quarters since Q3 2022 - but the cycle might be reversing, with earnings set to grow in low single-digit percentages in Q3 2023. Given the low base effect, corporate earnings might rebound in 2024, which should help charge up the bulls - a species that has been in the hibernation for over three months now.
Finally, from a valuation perspective, the forward 12-month price-to-earnings multiple of the S&P 500 has fallen to 17.1x, which is below the five-year average of 18.7x and the 10-year average of 17.5x. A combination of double-digit EPS growth and lower-than-average valuation multiples bode well for U.S. stocks as we head into 2024.
Overall, unless we see a major macro shock, I believe U.S. stocks are now set for a comeback after the brutal sell-off that we’ve seen over the last three months.
On the date of publication, Mohit Oberoi had a position in: AAPL , AMZN , META . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
