Just before Tuesday’s close, Netflix (NASDAQ:NFLX) reported better-than-expected earnings by adding 4.4 million subscribers in the third quarter. The company cited a robust slate of content including the hit Korean television show “Squid Game,” which helped bring in new subscribers. Netflix rallied 1.5% on the news.

Robotic surgery company Intuitive Surgical, Inc. (NASDAQ:ISRG) also squeezed in an earnings announcement just before the close. The company beat earnings and revenue leading to a 1.1% rally after the report.  

Wednesday’s premarket began with Verizon Communications (NYSE:VZ) beating earnings estimates but missing on revenue. The company also increased its forward guidance. However, the stock was little changed in premarket trading.

On the positive side, medical device company Abbott Labs (NYSE:ABT) traded 2.7% higher in premarket trading after reporting big profits on higher sales. To top off the positive earnings announcement, the company increased its full-year earnings outlook. Also, in health care, biotech stock Biogen (NASDAQ:BIIB) reported strong earnings thanks to its new Alzheimer’s drug. Biogen is also partnering with Sage Therapeutics (NASDAQ:SAGE) on an experimental depression drug they plan to submit to the FDA in the second half of 2022.

Not all health care stocks are having a positive morning, Novavax, Inc. (NASDAQ:NVAX) fell 22% in premarket trading on a news story from Politico that the company is struggling to manufacture its vaccine in a way that meets regulators’ quality standards. The issues are expected to delay the company and keep it from hitting key delivery targets.

Another negative theme is companies are having trouble controlling costs. Chili’s parent company Brinker International, Inc. (NYSE:EAT), WD-40 Company (NASDAQ:WDFC), and United Airlines Holdings Inc (NASDAQ:UAL) all reported earnings and cited struggles with higher costs, particularly labor costs, over the quarter. The reports appear to conflict with the Fed’s transitory inflation projection.

Oil service provider Baker Hughes (NYSE:BKR) missed on the top and bottom-line estimates despite competitor Halliburton (NYSE:HAL) meeting analysts’ expectations and projecting a “multi-year upcycle”. Even though oil prices have been rising, many oil companies are focusing on existing wells versus drilling new ones.  

Numerous other announcements are being released on a busy earnings day. However, companies like Tesla (NASDAQ:TSLA), CSX Corporation (NASDAQ:CSX), and Las Vegas Sands Corp (NYSE:LVS) are scheduled to announce after the close and will likely garner increased attention.

Looking outside of the earnings, the Chinese National Bureau of Statistics (NBS) reported that the China 70 Cities Housing Index stalled for the first time since COVID-19. Per Reuters, only 27 cities reported month-to-month gains. Other Chinese developers have also reported liquidity issues.  

October Surprise

September lived up to its billing with its September slump, but so far, October surprises haven’t materialized. You may remember that October has been the host of the Bank Panic of 1907, the Crash of 1929, which kicked off the Great Depression, and 1987’s Black Monday. However, the Stock Trader’s Almanac reported that October is a relatively positive month on average. In fact, the almanac stated that as summer ends, money managers start selling and reallocating their portfolios for the remainder of the year. In October, the market usually finds a bottom from the September selling and turns higher.

While a surprise could still come, the S&P 500 (SPX) has climbed more than 5% from its October low. Investors appear to be encouraged by positive earnings reports from financial stocks that kicked off the third-quarter earnings season, as well as early reports that many consumer stocks have been able to navigate supply chain issues.

Many stocks that have reported earnings have shown to be relatively immune to rising inflation and the fact that Crude Oil (/CL) has climbed more than 10% from the beginning of the month. Rising inflation has pushed the 10-year Treasury Yield (TNX) more than 10.7% higher for the month. These conditions have helped the Energy, Financials, and Materials sectors lead the recent rally.

As long as companies can continue to pass on price increases to consumers without seeing a decline in sales, and barring any more COVID-19 variants, investors could see the bounce continue. However, if these things did happen, they really wouldn’t be surprises. The real surprise would likely be something that isn’t anticipated. 

CHART OF THE DAY: BOO BOUNCE. The S&P 500 (SPX—candlesticks) has nearly recovered its losses from the September slump. Data source: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

4th Quarter Comebacks: A 2021 study from Schaeffer’s Investment Research found that the fourth quarter of the year tends to be the strongest quarter for stocks. Since 1950, the S&P 500 has seen positive returns 80% of the time while averaging a 4% return. Since 2010, the index has averaged 5% in the fourth quarter. Of course, past performance is not a guarantee of future performance.  

Down the Back Stretch: The top sectors usually get a lot of headlines and attention, but what about the bottom sectors? So far this quarter, the S&P Health Care Select Sector Index ($IXV) has only returned 0.95%, the S&P Consumer Staples Select Sector Index ($IXR) has returned 1.92%, and the S&P Utilities Select Sector Index ($IXU) has returned 3.19%. While a rising tide does appear to be raising all boats, these groups just aren’t attracting as much attention as other sectors.

One trait these groups have in common is that they’re defensive sectors, which means they’re the type of sectors that tend to perform best when markets turn bearish. This could be seen by some investors as a good sign that the bull market still has some legs. Energy, Financials, and Materials tend to be late-stage market expansion leaders. When defensive sectors begin to take leadership, many investors see this development as a negative for the markets.

Capping It Off: Large- and mega-cap stocks, as measured in the Russell 3000 Index (RUA) and the CRSP US Mega Cap Index (CRSPME1), are also among the leading market sectors, while the Russell 2000 (RUT) small-cap index is falling behind. As an economy is moving into a late-stage expansion, investors will often “flee to quality”. They’re less likely to take on the risk of smaller companies and focus on the relative safety of large companies. With that said, the Russell 2000 has moved mostly sideways for the year and has not sold off.

In the value versus growth sectors, the S&P 500 Pure Value Index ($SP500PV) is showing greater relative strength compared to the S&P 500 Pure Growth Index ($SP500PG). Growth has outperformed value most of the year, but over the last month, value has started to rise. Growth stocks tend to do worse when interest rates rise because the rising interest rates hurt them when calculating a stock’s intrinsic value. One month doesn’t make a trend, but this could be an interesting development because investors may start demanding more from companies when it comes to delivering on their visions and promises.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image Sourced from Pixabay