Stocks overcame poor earnings results from some of America’s largest companies to post gains last week as investors cheered positive earnings surprises, easing inflation and a rebound in economic growth. The Dow Jones Industrial Average rose 5.72%, while the Standard & Poor’s 500 advanced 3.95%. The Nasdaq Composite index added 2.24% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, gained 4.89%.1,2,3
Some mega-cap technology companies were under pressure last week on weak earnings and tepid fourth-quarter guidance. They reported multiple headwinds, including declining advertising revenues, loose expense control, and a slowdown in cloud growth. Meanwhile, positive earnings surprises from “old economy” companies powered markets higher. This market bifurcation was evident in the divergence in the performance of the Dow Industrials and the Nasdaq. The S&P 500 posted a substantial gain despite its disproportionate weighting of mega-cap stocks, which helped illustrate the power of the rally. Momentum accelerated into Friday, aided by an easing in inflation and a solid third-quarter Gross Domestic Product (GDP) report.
After two straight quarters of negative economic growth, the initial estimate of the third quarter’s GDP came in at a solid 2.6%, exceeding economists’ 2.3% estimate. The surprising economic performance was largely attributable to an increase in exports, which narrowed the trade deficit, a development that may not repeat going forward.4 Particularly encouraging was the personal consumption expenditure price index, a report used by the Fed to track inflation. It increased 4.2%, well below the 7.3% jump from a quarter ago.5
1. The Wall Street Journal, October 28, 2022 2. The Wall Street Journal, October 28, 2022 3. The Wall Street Journal, October 28, 2022 4. CNBC, October 27, 2022 5. CNBC, October 27, 2022