The third quarter is upon us. While there shouldn’t be any expectations of declines from the standpoint of revenue and earnings, equity valuations is still a concern for many investors. And as we say goodbye to September and welcome October, the memories of October stock crashes — those of 1929, 1987, 1997 and 2008 — will inevitably keep portfolio managers awake at night.
But amid inevitable doomsday predictions, I would argue, however, that stocks, despite the record levels of the three main benchmarks, are not as risky from a historical comparison perspective. And this is because, as we’ve noted, economic conditions have all of the pillars in place (improving wages, low unemployment, moderate inflation, etc.) to sustain growth for the long term.
What’s more, there are few present signs of traditional bull market killers such as overconfidence and high interest rates. So, given that there are significantly fewer market-destructive things in the pipeline to sink not just corporate profit growth, but our economy, I don’t expect an “October surprise.”
Conversely, in the past 20 years, October has historically been a good month for the Dow, posting gains of nearly 2% and finishing higher 70% of the time, according to Bespoke Investment Group. So, where will October 2018 rank in terms of “trick or treat?” Time will tell. But we won’t have to wait very long to get more data on what could (or should) justify a strong October.
This coming week, focus shifts to PMI reports, factory orders, September employment report and a host of economic data that will be closely watched and potentially shoot the commentary away from trade wars and tariffs. On Monday, Oct. 1, construction spending report for the August will be released at 10:am. Analysts are looking for a rise of 0.3%, versus prior estimates of 0.1%. September auto sales report is due out on Tuesday and it could have huge implications on the likes of General Motors (GM) and Ford (F), which are trading on 52-week lows.
Electric luxury car maker Tesla (TSLA) will be out with its third quarter deliveries report. Analysts are targeting total deliveries of 80,000 for the month, including 52,000 Model 3 units. ADP employment report comes out on Wednesday, followed by Weekly jobless claims on Thursday. Both reports will underscore the strength of the labor market, while serving as a precursor for Friday’s closely-watched jobs reports (non-farm payrolls) and unemployment rate, which come out at 8:30am.
On the earnings front, we will be two weeks away from the start of the Q3 earnings season. This week’s economic indicators will set the backdrop from what the earnings press releases will look like and the commentary CEOs will adopt as basis for their guidance. But as long as the earnings trends remains positive, the long-term trajectory of stocks will remain favorable. Here are a couple of stocks to keep an eye on for this coming week.
Pepsi (PEP) - Reports before the open, Tuesday, Oct. 1
Wall Street expects the company to earn $1.57 per share on revenue of $16.38 billion. This compares to the year-ago quarter when earnings came to $1.48 per share on revenue of $16.24 billion.
What to Watch: Changing consumer health trends, particularly with declining soda consumption and new taxes on sugar-sweetened beverages, has pressured Pepsi’s North America Beverages business. The company’s Frito-Lay North America segment, which generates more than half of its consolidated revenue, has been a bright spot, growing more than 4% in the fiscal second quarter and offsetting weakness in beverages. With the shares down more than 7% year to date, now would be a good time to bet on a rebound.
Costco (COST) - Reports after the close, Thursday, Oct. 4
Wall Street expects the company to earn $2.36 per share on revenue of $44.27 billion. This compares to the year-ago quarter when earnings came to $2.08 per share on revenue of $42.3 billion.
What to Watch: The largest warehouse retailer in the U.S. will report fiscal fourth quarter earnings Thursday after the closing bell. Despite operating in a highly competitive and mature retail industry, Costco — as evidenced by the 7% jump in September same-store-sales — is still finding ways to not only grow its membership total, its also getting its members to spend more. Membership income surged 14% last quarter. And that powerful combination had made COST stock a winner despite the threat of Amazon (AMZN).