Stock Market This Week: Five Themes to Watch

Following a series of wildly volatile trading, the benchmark U.S. equity indices gave investors something to cheer about last week. On Friday, the S&P 500 gained 2.4% on rumors that the Federal Reserve will ease its hawkish monetary policy. Previously, significant rate hikes lifted borrowing costs, thus clouding projections of economic viability and also sparking recession fears.

For the week, the venerable index gained 2.3%, raising hopes that Wall Street can sustain the momentum. This will require significant work, though. For the year, the S&P finds itself down nearly 22%, thus remaining mired in what many analysts consider bear market territory.

For the Nasdaq Composite, it gained 2.3% on Friday, empowering a 2.1% performance over the trailing week. Still, the technology-centric index has even more obstacles ahead, shedding over 31% on a year-to-date basis.

Although the Fed mulling reduced intensity of rate hikes presents much encouragement, investors should consider the bigger picture. As the events of the year so far have proven, anything can happen in the post-pandemic new normal. Thus, vigilance remains the key attribute to possess as market participants await yet another likely tumultuous week on Wall Street.

U.K. Turmoil Raises Wider Questions

Last week, international headlines were ablaze as British Prime Minister Liz Truss quit Thursday. According to the Associated Press, “After just 45 days in office, Truss became the third Conservative prime minister to be toppled in as many years, and she will go down as the shortest-serving leader in British history.”

In addition, “Her resignation extends the instability that has shaken Britain since it broke off from the European Union and leaves its leadership in limbo as the country faces a cost-of-living crisis and looming recession.”

Nevertheless, even with Truss’ departure, it still doesn’t automatically resolve the U.K.’s myriad problems. In addition, the Bank of England’s rescuing of its market through bond buybacks raises questions about stability protocols across the world.

For instance, investors should pay close attention to Japan, where its central bank implemented dovish policies in contrast to the hawkish sentiments of central banks elsewhere. Historically, Japan represents a major buyer of U.S. debt. Should an emergency erupt in the island nation, it could scale back or even sell Treasuries. That would force the Fed to respond, thus creating countervailing forces to its current implementation of rate hikes.

Escalating Violence in Ukraine May Require a Response

Far from a quick invasion of a militarily inferior opponent, Russia’s attack against Ukraine continues onward. Undeterred by setbacks in the battlefield, Moscow instead doubled down on its campaign, recently launching a partial mobilization which sparked chaos, resulting in thousands of Russian men fleeing to neighboring countries.

So far, the U.S. and its western allies have steadfastly supplied weapons to Ukraine. However, recent events suggest that western forces may need to provide even more decisive assistance. In recent weeks, the Kremlin dramatically escalated the violence in eastern Europe, including drone strikes in Kyiv and other major cities. Since these assaults impact largely civilians and non-military infrastructures, just the humanitarian circumstance alone may require sending advanced aerial-defense systems.

Moreover, Russia’s brazen attacks may also compromise critical infrastructures, such as nuclear power facilities. Such incidents may have devastating consequences for western European countries, thus possibly requiring a NATO response.

Interestingly, shares of defense contractor Raytheon Technologies (RTX) enjoyed a strong performance last week, gaining over 5%. Since the company provides critical air-defense systems, Raytheon may see greater demand over the coming weeks and months.

Midterm Drama Imparts Geopolitical Concerns

With the critical U.S. midterm elections only several days away, the rhetoric naturally spiked. Indeed, the Associated Press reported that social media platforms are bracing for election-related mayhem. Beyond the now-usual pejorative attacks launched between the two major parties, the midterms may shape the framework of foreign policy.

Generally speaking, Democrats have been much more willing to support Ukraine’s defense against Russian belligerence. However, Republicans have expressed concerns about American taxpayers footing the bill for the conflict. Given that historical trends and current polls imply critical victories for conservatives, the crisis in eastern Europe – particularly the west’s response to it – is in limbo.

One factor that complicates the Ukraine crisis is China. With tensions high regarding China’s ambitions to take over Taiwan, the U.S. finds itself in an awkward position. Essentially, going to war against a major economic power presents a no-win situation.

One mechanism to prevent a wider conflict is to emphasize the consequences of military belligerence. Therefore, Republicans might not be able to completely block support for Ukraine, even if they win control of Congress.

Cryptos Stuck at a Critical Juncture

While rumors of the Fed relaxing its hawkish monetary policy may spark the occasional upside in the equities sector, investors should keep close tabs on the cryptocurrency market. If indeed the central bank decides to loosen up, cryptos should represent one of the biggest beneficiaries. After all, the sector is effectively a pure risk-on arena.

Unlike the stock market, the major cryptos are not tied to corporate earnings or revenue. Instead, they rise based on the assumption that at some point in the future, a buyer will be willing to purchase the underlying assets at a higher price. Colloquially, this concept is known as the greater fool theory.

Unfortunately, this framework doesn’t pan out favorably during deflationary cycles, where the dollar rises in relative value instead of eroding. Under this context, merely sitting on dollars is a far better choice than gambling on speculative financial vehicles.

Thus, the meandering nature of cryptos presents anxieties. Currently, the total market capitalization of this sector is around $924 billion. If it falls below the psychologically significant $900 billion level, investors should treat it as a red flag.

Earnings in Focus

Finally, the third-quarter earnings season is heating up, with several prominent companies set to release their results. On Tuesday, all eyes will likely focus on tech giant Alphabet (GOOG, GOOGL). Analysts on average expect its earnings per share to hit $1.26, which is down 10% on a year-over-year basis. However, revenue is expected to hit $70.7 billion, up 8.5% YOY.

Also on Tuesday, Enphase Energy (ENPH) will release its quarterly results. Covering analysts estimate that its EPS will come in at $1.09. Fundamentally, the solar energy specialist benefitted from the massive spike in energy costs due to inflation and other macro headwinds. Therefore, market observers will look for clues that it can sustain its positive momentum.

On Thursday, following the closing bell, Apple (AAPL) will disclose its fiscal Q4 results. The consensus EPS target is $1.27, which would represent a gain of 2.4% YOY. Also, analysts anticipate that Apple will post revenue of $88.9 billion, representing a lift of 6.6% YOY.

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