Major Equity Indices Decline as Post-Election Euphoria Fades

Equity markets tempered their post-election euphoria last week as major indices struggled to build on the prior week’s gains, while investors’ concerns over the path of interest rates were rekindled.
All major equity indices posted negative returns for the week while fixed income markets declined. The Dow Jones Industrial Average fell 1.17% while the S&P 500 Index retreated 2.05%. The laggards for the week were the technology-heavy NASDAQ Composite and the small-cap Russell 2000 indices, down 3.13% and 3.96%, respectively.1 The Bloomberg US Aggregate Bond Index declined 0.84%1 as long-term interest rates drifted higher, with the US 10-yr Treasury Bond ending the week up 13 bps to 4.43%2.
Economic data out last week highlighted the Retail Sales report on Friday along with the Consumer Price report for October earlier in the week. October retail sales grew 0.4% from the prior month, higher than economists’ expectations of a 0.3% rise and reflecting continued resilience in the American consumer. Meanwhile, retail sales for September were also revised up to 0.8%, an increase from a prior reading that showed a 0.4% increase in the month, according to Census Bureau data.3
The October consumer inflation report showed that core CPI (for all items excluding food and energy) rose 0.3 percent in October, as it did in August and September, for a 12-month rate of 3.3%, in line with economists’ projections and led higher by shelter costs.4 It also signals that the Federal Reserve’s fight against inflation is yet to be won. Similarly, the October Producer Price Index released on Thursday rose 0.2%, matching forecasts from economists polled by Dow Jones, with most of the rise in final demand prices being traced to a 0.3-percent advance in the Index for final demand services while prices for final demand goods inched up 0.1 percent.5
The week also saw a continuation of third-quarter corporate earnings season. At this late stage, 93% of the companies in the S&P 500 have reported results; 75% have reported EPS above estimates and the earnings growth rate is estimated at 5.4%, higher than the forecast 4.2%. Since September 30, positive EPS surprises reported by companies in the Financial, Communication Services, and Consumer Discretionary sectors, partially offset by negative EPS surprises in the Information Technology sector, have been the largest contributors to the increase in the overall earnings growth rate for the Index over this period.6
Some of the standouts last week included Shopify and Disney. Shopify’s shares surged after the e-commerce platform operator posted third-quarter operating income of $283 million, higher than the $122 million in the same quarter last year7. Disney popped on stronger-than-expected earnings and guidance, aided by growth in its streaming business, and guidance for high-single-digit adjusted earnings growth in fiscal 2025.8 However, a key laggard was Applied Materials, where shares tumbled after the semiconductor equipment manufacturer offered weak revenue guidance for the current quarter despite reporting better-than-expected fiscal fourth-quarter results and provided a strong outlook for adjusted earnings per share.9
While comments from Fed Chair Powell this week indicated that the economy was in a good place and that the Fed didn’t need to be “in a hurry” to slash interest rates10, it did give investors reason to re-assess the Fed’s glide path with respect to further easing of monetary policy. His comments had a direct impact on expectations of a further rate cut at the next meeting of the Federal Reserve in mid-December. There is currently a 65% probability that the Fed will cut 25 bps.11

Sources:
1. Morningstar Direct.
2. https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value=2024
3. https://www.census.gov/retail/marts/www/marts_current.pdf
4. https://www.bls.gov/news.release/pdf/cpi.pdf
5. https://www.bls.gov/news.release/pdf/ppi.pdf
6. https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_111524.pdf
7. https://www.cnbc.com/2024/11/12/shopify-stock-skyrockets-25percent-on-revenue-beat-rosy-holiday-forecast.html
8. https://www.cnbc.com/2024/11/14/disney-dis-earnings-q4-2024.html
9. https://www.cnbc.com/2024/11/15/stocks-making-the-biggest-moves-premarket-baba-amat-ulta-and-more.html
10. https://www.cnbc.com/2024/11/14/powell-says-the-fed-doesnt-need-to-be-in-a-hurry-to-reduce-interest-rates.html
11. https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html