Stocks Tread Cautiously as Earnings Season Begins Amid Mixed CPI Data

Middle East tensions propel oil prices skyward, spurring commodity price surge

• The stock market is reacting cautiously to mixed CPI data and the start of earnings season.
• Middle East tensions are driving up commodity prices; oil has surged over 4%.
• Global conflicts and economic uncertainties are challenging the prospect of a Fed interest rate hike.

The stock market experienced a modest decline yesterday, influenced by a mixed consumer price index (CPI) report and the anticipation of earnings season. Both the S&P 500 and Nasdaq Composite registered a 0.6% decrease in their respective indices. The day began with the release of the latest CPI report, revealing a 3.7% year-over-year increase in prices, consistent with the previous month of August. The core CPI, which excludes food and energy prices, showed a 4.1% rise, a slight drop from the 4.3% reported in August. While these figures indicated a gradual reduction in inflation, they were marginally higher than initial forecasts.

Earnings season officially commenced on that very morning with several banks, including JP Morgan and Wells Fargo, reporting better-than-expected earnings. Consequently, their stock prices experienced slight increases during premarket trading. Notably, both institutions also disclosed that consumers were reducing their outstanding loan balances, potentially signaling a slowdown in overall consumer spending and economic activity. Conversely, Blackrock's shares dropped by approximately 3% in premarket trading, despite beating earnings expectations, as they reported a substantial decline in inflows during the third quarter, down to $3 billion from the $80 billion recorded in the second quarter.

United Health Group, a Dow component, reported earnings that surpassed expectations, leading to a 2% rise in their stock price, which could potentially positively influence the Dow Jones Industrial Average. Additionally, U.K. regulators granted approval for Microsoft's $75 billion acquisition of Activision Blizzard, marking a significant development after overcoming regulatory challenges.

The promising start to earnings season bodes well for future performance. Currently, the S&P 500 is trading at just over 18 times projected earnings for the next 12 months, aligning with its historical average. This valuation has decreased from the nearly 20 times projected earnings multiple observed back in July. If companies continue to outperform earnings estimates, it could indicate stocks are undervalued compared to their historical average.

However, the most pressing news of the day pertains to the Middle East. Israel has issued an urgent evacuation notice to all 1.1 million civilians in Gaza within the next 24 hours, heightening concerns of an imminent ground war. The escalating tensions in the region have triggered a surge in commodity prices, with oil prices surging over 4% to more than $86 per barrel. Additionally, the prices of other commodities such as corn, soybeans, wheat, and precious metals like gold and silver, have seen significant increases.

Amid this global turmoil, JPMorgan Chase CEO Jamie Dimon, warned after the bank's earnings report that the world may be entering one of its most perilous periods in decades. He cited the conflicts in Ukraine and Israel, with concerns that the situation in Israel could escalate, potentially involving Iran, a nation that has been strengthening ties with Russia during the Ukraine conflict. The global situation appears highly volatile and shows no signs of improvement.

Finally, it's crucial to acknowledge the humanitarian crises in both the Middle East and Ukraine, with heartfelt sympathy for the innocent victims of these devastating conflicts. Simultaneously, it is essential to analyze how these events may affect the financial markets. While this week's economic data exceeded expectations, the broader global and domestic landscape remains fraught with uncertainty. The U.S. House of Representatives still lacks a speaker, and the threat of a government shutdown in November looms. Given these circumstances, it appears challenging for the Federal Reserve to implement an interest rate hike. The CME's assessment places the likelihood of a rate increase in November at less than 10%, with slightly higher odds for December, at 33%. These situations are dynamic, making it prudent to remain aligned with your investment strategy and long-term objectives.

JJ Kinahan is CEO of IG North America—which includes tastylive, tastytrade and IG's FX Business. Kinahan traded for 21 years at the Chicago Board Options Exchange. He serves on the CBOE Advisory Board and the SIFMA Options Committee. @thejjkinahan 

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