Morning Wrap: S&P 500 rallies ahead of US midterm elections, ASX set to rise

US stocks jump ahead of midterm elections, the S&P 500 has historically delivered positive returns 6 and 12 months post-midterms, Facebook-parent Meta plans to commence large-scale layoffs, the US dollar continues to fall and some key takeaways from US earnings season.

Let's dive in.

US MARKETS

Wall Street rallied for a second consecutive session as the US kicks off their midterm elections. The Democratic Party has held the majority in both the House and the Senate for the last two years, which has been helpful for President Joe Biden in passing the laws he wants. US market performance post-midterms has historically been very strong (historic performance below).

• Energy headlined gains despite oil prices taking a pause. The market seems to have largely ignored China’s commitment to lockdowns

• A mix of growth and defensive outperformed benchmarks, most notably Health Care, Industrials, Staples and a bounce for Tech

• 58% of stocks advanced

• 54% of stocks trade below their 200-day moving averages (55% on Monday, 53% a week ago) 

STOCKS

Meta (+6%) rallied after a Wall Street Journal report said the company is planning to begin large-scale layoffs this week.

Apple (+0.3%) shares rallied back to breakeven after cutting its outlook for iPhone shipments due to Chinese lockdowns. 

• “COVID-19 restrictions have temporarily impacted the primary iPhone 14 Pro & iPhone 14 Pro Max assembly facility located in Zhengzhou, China. The facility is currently operating at significantly reduced capacity..we now expect lower iPhone 14 Pro & Pro Max shipments.” - Apple press release 

EARNINGS

Approximately 85% of S&P 500 companies have reported third quarter earnings so far. Here are some key takeaways from DataTrek Research:

• “70 percent of S&P companies have beaten Wall Street earnings estimates this quarter, below 1, 5 and 10-year averages of 78, 77 and 72 percent respectively.”

• “The upshot here is that high inflation is allowing companies to outperform on the top line versus long-run average revenue beat rates/amounts, but that same inflation is causing considerable operating margin pressure.” 

• “Wall Street analysts have been cutting their estimates for future quarters in response to Q3’s lackluster results.”

Berkshire Hathaway (+1.5%) posted a 20% increase in operating profits to US$7.76bn, aided by gains from investments in insurance, energy and infrastructure. Though, it did post a net loss of -US$10.1bn.   

• "The amount of investment gains/losses in any given quarter is usually meaningless & delivers figures for net earnings (losses)appl/share that can be extremely misleading to investors who have little or no knowledge of accounting rules.” - Warren Buffett 

WORLD NEWS 

• iPhone plant woes are least of Apple's problems (Reuters)

• Global inflation may be nearing its peak says IMF (Bloomberg)

• Meta is preparing to notify employees of large-scale layoffs (WSJ)

• Morgan Stanley says US Midterms set to fuel stock rally (Bloomberg)

ECONOMY

No major economic updates.

COMMODITIES

Iron ore futures rose 0.3% to US$87.5 a tonne.

• “Northern China, home to large steelmakers, could see winter output cuts from mid-November, especially in the Hebei steel hub,” sources told S&P Global, adding that “these curbs are expected to remain smaller than the previous year.” 

Oil inched lower as Chinese officials pushed back the idea of easing covid restrictions.

• “Crude prices still seemed destined for a move above the $100 a barrel level but that might have to wait until we see a clear peak in cases. ​ China’s covid cases are at a six-month high and that might support holding onto their zero-Covid policy a little while longer,” - Oanda senior market analyst, Ed Moya

Gold eased after a massive rally on Friday.

• “The best-case scenario for gold is for a Republican sweep and further signs pricing pressures are easing. ​ Gold looks like it will closely track the dollar and that means it will hinge on this week’s inflation report.”

 Other commodities of interest:

• Natural gas +7.1% to US$7.03/MMboe

• Platinum +2.1% to US$981/oz

• Newcastle coal futures -3.7% to US$336/t 

QUICK BITES

• Post-midterm boom: The S&P 500 has had positive returns in the 6 and 12 months post-election, up a respective 15.1% and 16.3% on average.

Source: Ally Invest

• Bearish earnings revisions: The only sectors that have received positive earnings revisions for 2023 are energy and utilities. Everywhere else is facing drastic earnings downgrades, according to Goldman Sachs

Source: Goldman Sachs

• Seasonality update: Can the market piggyback the historic strength it sees post midterms and November/December.

Source: SentimenTrader

Learn more about our overnight ETFs.

I was a little disappointed about Monday's Wrap as it did not mention China's rejection of reopening rumours.

Although, it somewhat worked out in the end because the market traded like nothing happened. We didn't see key sectors like iron ore fade on the news.

We continue to see an outperformance from the blue-chip Dow, while the S&P 500 and Nasdaq lag.

SPI futures imply a +0.56% open for the ASX 200. Eyes on whether or not banks can bounce back after Westpac's -3.9% selloff on Monday. The US dollar also extended its selloff but some commodities like oil and copper eased after a big rally last Friday.

Stocks going ex-dividend over the next week:

• Tue: Reckon (RKN)

• Wed: KMD Brands (KMD), ResMed (RMD), Waterco (WAT)

• Thu: Acorn Capital (ACQ)

• Fri: Challenger (CGF)

• Mon: Lion Selection Group (LSX)

ASX corporate actions occurring today:

• Dividends paid: New Hope (NHC)

•  Listing: None

Other things of interest (AEDT):

• 10:30 am: Westpac consumer confidence index

• 11:30 am: NAB business confidence index