Earnings tipped to slow as US stocks end best quarter in five years

Dow extends gains to ninth consecutive quarter; Musk settles with SEC.
Tesla chief executive Elon Musk will step down as chairman and pay a total of $US40 million in fines

Corporate earnings in the US are projected to slow in the third quarter after the breakneck pace of the previous two periods pushed stocks to near all-time highs.

The S&P 500 climbed 7.2% in the third quarter, its best performance since the fourth quarter of 2013. It is up 9% for the year.

The Dow Jones Industrial Average climbed 9% in the third quarter and the Nasdaq Composite rose 7.1%, extending its streak of gains to nine consecutive quarters. All three major indexes are within about 1% of their all-time highs.

But data from FactSet show S&P 500 companies are expected to report a 19% jump in profits when earnings season kicks off in mid-October, down slightly from the 25% increase they posted in the first and second quarters,.

“There are lots of reasons investors are worried,” Wells Fargo Private Bank chief investment officer Erik Davidson, says.

“There are a lot of things that could go wrong but the risk of things going right is equally as likely.”

Shares of healthcare companies led the way in the S&P 500 in the third quarter with a gain of 14%, overtaking the technology sector, which has slumped in September.

Google parent Alphabet slumped 2% in September, while Apple fell 0.8% and Facebook dropped 6.4%.

Week ahead forecasts
In the week ahead,
the ISM releases its September measures for manufacturing and the services sectors. American factory activity in August expanded at the strongest pace in more than 14 years. Economists surveyed by the Wall Street Journal forecast a September manufacturing index reading of 60.1.

Services sector activity grew robustly in August and the index is expected to clock in at 58.0 in September.

The closely watched September jobs report will be released at the end of the week. Employment in August showed solid job gains and wage growth. Economists forecast non-farm payrolls increasing by 185,000, while the unemployment rate ticked down to 3.8%.

August trade data is also expected late in the week. Recent figures have shown a widening trade gap. Economists expect the trade deficit to widen to $US53.5 billion in August from $US50.08b a month earlier.

On Friday, The Dow rose 18.38 points, or less than 0.1%, to 26,458.31. The S&P 500 was little changed at 2913.98 and the tech-heavy Nasdaq Composite slipped less than 0.1% to 8046.35.

Tesla shares slump
Tesla shares were among the biggest movers, plunging 14% after the Securities and Exchange Commission and chief executive Elon Musk reached an agreement on charges of misleading the market.

Mr Musk will step down as chairman for three years with he and Tesla each paying a fine of $US20 million.

Tesla also agreed to appoint two new independent board members, establish a new committee of directors and create controls to oversee Mr Musk’s communications.

The US-China trade war remains the major risk to world markets. The raft of tit-for-tat tariffs have individual stocks – particularly auto, machinery and semiconductor makers – but have had only a marginal impact on the broader stock market.

“The results of tariffs just implemented haven't found their way into the market yet,” Fidelity Investments director of global macro Jurrien Timmer. “If there is an impact, we will see it in the earnings in the fourth quarter.”

China exports slow
However, it’s a much different story in China where the benchmark Shanghai Composite is down 15% this year and Hong Kong’s Hang Seng has dropped 7.1%.

Since early July, the Trump administration has imposed tariffs on $US250b of Chinese goods, while retaliation has affected $US110b of US goods.

President Donald Trump has also threatened tariffs on an additional $US257b of Chinese products, essentially subjecting all exports to the US.

China’s exports to the US last year were about four times those from the US to China, closing the door on further tariff options.

Data released at the weekend showed the impact of the tariff war on the Chinese economy. Weakening foreign demand and sluggish domestic consumption have forced Chinese manufacturers to significantly scale back production.

The Caixin China manufacturing purchasing managers index, which is heavily weighted toward small, private firms, fell to 50.0 from 51.0 in August, ending 15 straight months of expansion.

New export orders, though still in expansionary territory, slipped to their lowest point since February 2016.

The official manufacturing purchasing managers index, which is tilted toward large, state firms, slipped to a seven-month low of 50.8 in September from 51.3 in August.

Oil prices go higher
Brent crude, the global benchmark, jumped 4.1% in the third quarter to $US82.72 a barrel, the highest level in nearly four years. It is up 24% for the year.

US crude edged down from its most recent multiyear high, falling 1.2% to $US73.25 a barrel in the September quarter, though it has risen in five of the past six weeks. It has risen 21% this year.

“When you have a geopolitical risk backdrop like this, it just fuels bullish market sentiment,” Barclays head of energy commodities research Michael Cohen says. “The fundamentals of the market are tightening before some had expected.”

US government bond prices held steady on the last trading day of the quarter and in a week where the US Federal Reserve lifted official interest rates.

The yield on the 10-year Treasury note rose to 3.055% from 3.054%  on Thursday. This was its fifth consecutive quarterly climb, its longest such streak since 2013.