The S&P 500 Index and its top ETFs like VOO and SPY have moved sideways recently, ignoring major events like the strong second quarter earnings and the hawkish Federal Reserve. This article looks at some of the top catalysts that will move the index in October.
S&P 500 Index to react to earnings season
The most important catalyst for VOO and SPY is the upcoming earnings season, which will start on October 13 when top companies like JPMorgan, UnitedHealth, Johnson & Johnson, and Bank of America will publish their earnings.
Analysts are highly optimistic about the earnings season, with the average estimate being that growth jumped by 29% last quarter. In most cases, the real figure is usually higher than expectations.
For example, before the second quarter earnings, the expectation was that earnings would grow by about 25%. In reality, the final figure was over 50%.
The earnings growth is being driven by the robust AI spending, with companies like Microsoft, Google, and Meta Platforms spending billions of dollars. These funds are then moving down the value chains in areas like memory, GPU, optical devices, and servers.
A good example of this is Micron, which made over $54 billion in revenue the fourth quarter of the fiscal year. Its guidance was for its revenue to be $50 billion.
Rising oil and gas prices has also pushed earnings growth higher, with companies like ExxonMobil, Chevron, and Marathon Petroleum reporting strong numbers.
Federal Reserve interest rate decision
The other important catalyst for the S&P 500 Index and its top ETFs like SPY and VOO is the Federal Reserve, which will deliver its interest rate decision on October 28.
Economists expect the bank to hike interest rates in this meeting. However, whether to hike or leave them unchanged will depend on the upcoming macro data.
The first key data to watch will be the upcoming nonfarm payrolls (NFP) report that comes out on Friday. After that, the US will release the headline and core inflation data on october 14.
A strong jobs report followed by high inflation will lead to higher odds of interest rate hikes. In most cases, the stock market tends to struggle when the Fed is hiking rates.
US bond market and US-Iran war
The other important driver for the S&P 500 and other indices will be the developments between the US and Iran. The two sides have maintained a relative calm in the past few weeks, which has contributed to lower oil prices.
Media reports suggest that traffic through the Strait of Hormuz has improved, while Saudi Arabia has reopened the East-West pipeline. The stock market should do well if the status quo remains.
However, with the US midterm elections coming up, chances are that Iran will escalate, which will drive oil prices higher.
Higher oil prices, on the other hand, will lead to soaring bond yields. The ten-year yield has jumped to 5.2%, while the 30-year has soared to 5.636%. Stocks tend to underperform the market whenever there are jitters in the bond market.
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