Wall Street appeared rather disinterested on Monday ahead of a busy week of earnings reports and stocks weakened on the back of some unsurprising, but still low-volume, profit-taking on the back of six straight weeks of gains. Although the tech-heavy NASDAQ made something of a comeback later in the day boosted by a good session for some select tech names including Nvidia, the S&P 500 index still finished in the red.

The flourishing narrative that the Fed is going to be cutting rates less aggressively going forward than originally anticipated as well as the growing expectation in the bond market that the next President will be one who will spend money like a drunken sailor, start a global trading war and jack up the fiscal deficit, the rate of inflation and the probability of the US sliding into a recession sometime in 2025 or 2026 is driving market interest rates higher (and thereby bond prices lower).

This was noticeably on display on Tuesday morning with yields spiking upwards on these worries both in the U.S. and around the world, but particularly in the U.S. 10-year Treasury rate from which most mortgage rates pivot (see the AVERAGE 30-YEAR FIXED MORTGAGE RATE below).

Stocks, particularly Small Cap names, were unnerved by these interest rate gyrations and prices fell at the open, further pressured by disappointing outlooks from Verizon, Lockheed Martin and GE Aerospace. Despite a valiant recovery attempt in the late afternoon, the S&P 500 suffered back-to-back down-days for the first time in 31 trading sessions.

While a month and a half without consecutive negative days may not sound like much, that streak actually ranks among the best since 1928. Such is the stratospheric level of market optimism that we have reached lately.

A continuing move higher in interest rates, ramped up electoral rhetoric, McDonalds’ E. Coli woes (see OTHER NEWS below) and a horrendous Q3 report and outlook from Starbucks negatively impacted stock prices at the open on Wednesday and things only got worse as the session wore on as interest rates kept on climbing and the indexes’ losing run reached three days, not helped by underwhelming earnings reports from IBM, 3M and L’Oréal.

Recent enforced deep price cuts and aggressive sales promotions helped Tesla report better-than-expected earnings after Wednesday’s close. On Thursday, in response to the Tesla news (the stock went on to erase the entirety of its 2024 losses in just one session, despite Wall Street Journal revelations of Musk’s apparent ongoing secret chummy talks with Putin since 2022) as well as some other robust earnings from the likes of economic bellwether UPS and another surprisingly sharp fall in Weekly Jobless Claims, the broad stock market moved mostly higher, snapping the S&P 500’s three-day losing skid. Tech stocks outperformed.

The green on the screen continued into Friday morning as market interest rates finally retreated from recent highs. A major analyst downgrade of Apple took some of the shine off and by the time the closing bell rang the S&P 500 had petered out to finish basically unchanged although the NASDAQ still managed to eke out a gain. Overall, the S&P 500’s six week winning run came to an end but the NASDAQ just about extended its winning streak to seven weeks.

After Friday’s close, Israel started dropping bombs on Tehran and elsewhere in Iran, sending the geopolitical temperature soaring in the Middle East.

It’s important to recognize that much of the good news we’re getting (solid growth, stable earnings, falling inflation) is already reflected in the S&P 500 above 5,800. As such, simply more of the same is not very likely to propel the broad stock market much higher in the near term.

Equally important to understand is that there are still risks to this market. They may currently not be the catastrophic risks of 1) a sudden dramatic slowing of the economy, 2) a spiking resurgence in inflation or 3) a collapse in the quality of earnings reports, any or all of which could cause a serious fall in stock prices.

But lower-level, lower-consequence risks remain, including:

* Fewer Fed rate cuts than expected. If data is so good, then the Fed may cut less than expected, both terms of frequency and intensity. The market is pricing in a total of another half a percent of cuts in 2024 and then a consistent cutting cycle in 2025. If that starts to come into doubt, it’ll be a real problem for the rally since it is so baked in.

* Geopolitics and Politics. The stock market currently assumes no meaningful degradation in the Russia/ Ukraine war or in the Middle East conflicts and most likely a Trump victory at the polls with a possible red sweep of all branches of government. The geopolitical situation remains tense and unpredictable (see what happened on Friday evening in Iran) and the race for the White House remains extremely tight so the market’s assumptions may well not come to pass and we could be in for a very difficult post-election period (see OTHER NEWS below).

* Earnings. Q3 earnings season is off to a generally fine start. But it’s still early and the next two weeks are really the heart of the season. Mediocre (or even just “not great”) reports still have the potential to disappoint markets who could hand out severe punishment to the offending companies.

So, don’t be surprised if a) markets just continue churning at these levels even on the back of more positive news, or b) markets are ultra-sensitive to any sudden, negative surprises and fall harder more than the actual data might warrant.

OTHER NEWS ..

McSickness .. McDonald’s Quarter Pounders (or more specifically the onions used in the sandwich) were linked on Tuesday to an E. Coli outbreak that sickened at least 49 people, mainly in Colorado and Nebraska and killed one, the U.S. Centers for Disease Control and Prevention said. At least ten people were hospitalized, including a child, the agency said. All reported eating at McDonald’s shortly before falling ill and specifically mentioned having eaten a Quarter Pounder, the agency said.

The price of the restaurant chain’s shares dropped more than 10% in after-market trading on Tuesday and continued even lower as the week went on.

Trouble Brewing? .. Trump’s recent improvement in the polls and betting markets now makes it a near-certainty that, should he lose the election next month, he and his supporters will refuse to accept the result and this will likely unleash furious claims of fraud, multiple recount demands, a blizzard of law suits and very possibly organized political violence.

A U.S. intelligence services report just last week warned that Russia is planning to aggressively ferment and encourage such violence in the case of a Harris victory, amplified by outright lies and baseless and dangerous conspiracy nonsense via “friendly” and loosely-monitored social media platforms like X/Twitter, starting on the final days before election day on November 5th and all the way through to a violent climax on inauguration day on January 20th.

This would all inject Wall Street’s worst nightmare, uncertainty, into the equation potentially for an extended period of time after the election itself and cast a shadow over the end of year time period that is historically very strong for stocks. It can be argued that, at these current record-breaking-adjacent levels, stock markets could be severely underestimating the potential political and social chaos that could be generated by this election and its aftermath.

Growth Hiccup? .. The International Monetary Fund (IMF) lowered its global growth forecast for next year and warned of accelerating risks from wars to trade protectionism, state subsidies and tariffs.

It forecasts global GDP to grow by 3.2% in 2025. The biggest GDP growth is predicted to be in India (6.5%), Saudi Arabia (4.6%) and China (4.5%). The U.S. economy is expected to grow by 2.2% next year with Japan and European nations lagging behind that.

ARTICLE OF THE WEEK ..

Don’t be forced into a financial mistake by the election! A collection of the very best U.S. election-related charts and takeaways from Ritholtz Wealth Management.

THIS WEEK’S UPCOMING CALENDAR ..

This week is the biggest of the Q3 earnings season and will feature reports from five of the Magnificent Seven: Alphabet/Google, Amazon, Apple, Meta/Facebook and Microsoft. The bar couldn't be higher, with most of the group sitting on very high valuations and market-beating gains so far his year.

Other big names to report this week include Exxon-Mobil, Eli Lilly, Pfizer, Ford, Uber, McDonalds, AMD, Chevron, Mastercard, PayPal, Conoco Phillips, Intel, Caterpillar, Chipotle, eBay, Coinbase and Comcast.

The economic-data highlight of the...