Bad News Doesn't Matter

Analyzing the markets with Richie Naso, a Wall Street veteran of over 40 years and former member of the NYSE.

• DJIA 52-wk: +12.09% | YTD: +10.96% | Wkly: +2.20%
• S&P 500 52-wk: +16.93% | YTD: +15.47% | Wkly: +1.92%
• NASDAQ 52-wk: +25.31% | YTD: +20.17% | Wkly: +2.31%
• SPDR Gold Shares 52-wk: +49.03% | YTD: +55.92% | Wkly: -2.95%

Market Movement & Highlights

• Markets generally ended higher over the week, buoyed by positive inflation signals and stronger-than-expected earnings. Financial Times
• On Friday, stocks reached new highs: the S&P 500 rose 0.8%, and the Nasdaq added about 1.2%. Financial Times
• The Dow, S&P 500, and Nasdaq all posted solid gains early in the week, driven in part by a rebound in tech and strength in Apple shares. AP News
• Treasury yields rose, reflecting better risk appetite and expectations of policy changes. Reuters
• Volatility pulled back: notably, the VIX dropped ~17.9% to about 20.78. Nasdaq

Drivers & Themes

1. Inflation & Fed Expectations

A key anchor for the market was softer-than-expected inflation data, which reduced fears of aggressive rate hikes and bolstered expectations that the Fed could begin easing policy. Financial Times

2. Earnings Optimism

Earnings season kicked into gear, with several large-cap names beating estimates or guiding optimistically. That boosted investor sentiment broadly. Reuters

3. Trade & Macro Stability

While trade tensions and tariffs have been a recurring risk driver, this week those pressures eased somewhat—at least enough so that they didn’t derail the rally. Reuters

Risks & Headwinds

Data Blackout / Government Shutdown

The federal shutdown continues to delay key economic data releases (e.g., from BLS), making investors reliant on private or alternative data. BlackRock

Earnings Misses / Guidance Weakness

Though many reports were strong, any poor guidance or outlook slips from big names could rattle the market.

Interest Rate Sensitivity

If inflation surprises upward, or the Fed signals hawkishness, it could reverse sentiment swiftly.

Valuation Pressure

With markets nearing or at record levels, some overextended names might face sharp pullbacks on any adverse news.

But really, it all comes down to earnings. Prominent U.S. companies, including Coca-Cola, GE Aerospace, General Motors, and other bellwethers, reported healthy results, putting earnings on pace to increase by 8.9% for the third quarter based on current releases and expectations, according to Evercore ISI data. Profits could grow by nearly 13% if beats remain strong, according to Evercore strategist Julian Emanuel.

That puts the pressure on top companies to keep reporting earnings that beat Wall Street’s forecasts - and failure to do so could be met with severe consequences. According to data from FactSet, S&P 500 companies that reported earnings below forecasts through Oct. 23 fell 4% in the two days before their earnings release through the two days after it, compared with an average 2.6% drop for a stock with an earnings miss during the past five years. (FactSet looks at that four-day period to get a slightly longer view of how companies trade around earnings.) And even companies that had superb earnings - we’re looking at you, Vertiv Holdings and GE Vernova - ended lower.

Chalk the declines up to how rich the stock market is. The S&P 500 is trading at 22.2 times earnings estimates for 2026, well above its five-year average of 19.5, which means that nearly all companies will have to top forecasts to justify this premium. “Valuations are absolutely challenging,” Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management, told Barron’s. “There is a big penalty if you miss.”

With that in mind, investors should keep a close eye on the coming deluge of earnings. Five of the Magnificent Seven - Alphabet, Amazon.com, Apple, Microsoft, and Meta Platforms, are on tap to report during the week of Oct. 27. So are Dow components Visa, UnitedHealth Group, Verizon Communications, Caterpillar, Boeing, and Chevron. If too many of them stumble, the market could take a hit.

Small-cap stocks aren’t out of the woods yet either. The S&P Small Cap 600 was on track to gain 3.2% this week, and profits for the index, which slid in 2023 and 2024, are expected to increase 10% this year and surge another 20% in 2026. Together, that has investors feeling pretty good about buying smaller stocks. “If you are a small cap investor, you’re coming off a tough period,” says Bill Hench, head of the small-cap team at First Eagle Investments. “But now there is a little glimmer of hope.”

Just remember, hope isn’t a strategy, and can quickly turn to despair if results fail to live up to the hype.

Meta, Microsoft, and Others Need Power. These Utility Stocks Will Benefit.

Key Points

• Artificial intelligence’s power demands are driving growth for regulated utilities, as data centers require new power plants.
• Analysts project 8.8% aggregate annual earnings per share growth for utilities through 2027, up from 7% this year.
• Mergers and acquisitions are anticipated in the utility sector, with smaller providers like AES and Avista being potential targets.

Regulated utilities are headed for a new era of growth, given the power that artificial intelligence requires. Look for some smaller providers to receive merger and acquisition offers.

The root of the story is that AI requires hyperscalers Microsoft, Oracle, Meta Platforms, Alphabet, Amazon.com ( AMZN +1.41%) to build more data centers, which require power. This means utility providers must build new power plants, which they monetize by agreeing with their states to earn a certain rate of return on. As they grow their plants, or what industry folks call their “rate bases,” they will grow earnings.

Earnings growth will increase moderately. McKinsey & Company forecasts data center capacity can grow by just over 20% annually through 2030. The total rate base growth for utilities will be much lower than that because a chunk of their rate bases are still in the slower-growing residential businesses.

But data center demand should still drive growth a bit higher for many years to come, especially because plant build-outs will take longer than data center completions. Analysts expect companies on the Utilities Select Sector SPDR Fund (XLU +1.17%) to grow earnings per share, by 8.8% annually through 2027, according to FactSet, up from 7% this year.

The whole picture makes M&A in utilities likely, especially because there are about 3,000 electric utility providers in the U.S., according to the Transportation Department. Through the first half of this year, 24 power and utility deals happened, according to PricewaterhouseCoopers, up from 17 in the same period last year. Plenty more are possible, given the number of utilities out there.

More deals could come in the form of mergers or purchase offers from larger utilities because of the potential synergies. Sure, creating revenue synergies, which is when a combined company uses its scale to create higher revenue than the sum of its parts, may prove difficult because utilities are regulated. States don’t want to raise costs for consumers more than they have to. But cost synergies are easier, meaning a combined company could eliminate redundant costs and drive higher profits than the two stand-alone entities could achieve.

That’s one of the potential drivers behind more deals, says Gabelli Funds portfolio manager Tim Winter, who expects more “consolidation” in the sector.

Winter says utilities could also attract buyers from private equity or infrastructure investment funds. They like the growth potential of the sector. They can’t easily achieve synergies, given that they’re not utility companies themselves.

News on Geopolitical issues, tariffs, government shutdown or earnings doesn’t seem to shake up this market. They certainly look like they’re going higher.

— Richie

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