US stocks struggle to make ‘crazy’ pullback rally last as earnings season gets under way

What’s up

• Dow Jones Industrial Average DJIA,
  -0.83%
  fell 223 points, or 0.7%, to 29,815, after rising 390 points at its peak.

• S&P 500 SPX,
  -1.68%
  was down 58 points, or 1.6%, to 3,612.

• The Nasdaq Composite fell 227 points, or 2.1%, to 10,422.

On Thursday, the Dow erased a nearly 550-point drop to end 828 points higher, while the S&P 500 rebounded from a loss of more than 2% to end 2.6% higher and the Nasdaq Composite jumped 2.2%.

The Dow’s 2.8% gain was the biggest one-day gain since November 9, 2020.

See: Why stocks suffered a historic setback after another hot inflation report

What drives the markets

Early Friday gains gave way to losses after the University of Michigan’s consumer survey showed expectations for inflation over the next year rose to 5.1% from September’s one-year low of 4.7%, while expectations for inflation over the next 5 years rose to 2 .9% from 2.7% last month.

“The uptick in inflation expectations is likely a response to the rise in gas prices in recent weeks, in which case it will not continue,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note, noting that preliminary readings tend to see large revisions.

“Still, on the heels of September’s inflation data, this uptick – reversing last month’s decline – does not look good, given how closely policymakers appear to be watching the measure,” Shepherdson said.

The survey’s gauge of consumer sentiment rose to 59.8 in October from 58.6. Economists expected a reading of 59, according to a Wall Street Journal poll.

Data on Friday also showed US retail sales were unchanged in September, coming in below forecasts for a 0.3% increase. Excluding cars, sales rose by 0.3%.

Analysts cited a number of factors to explain the huge rally in stocks on Thursday, which came after stocks initially fell following a warmer-than-expected consumer price index in September.

Factors behind the rebound included technical and positioning considerations after a steep selloff that had sent the S&P 500 index down for six straight sessions to end Wednesday at its lowest since November 2020.

“Among the most frequent explanations is that the most pessimistic of all possible scenarios was built into prices: a 75-point interest rate hike in the next two meetings,” Alex Kuptsikevich, senior market analyst at FxPro, said in a note. “Following this, market participants turned their attention to significant price discounts from the highs with a relatively healthy economy continuing to create jobs and increase wages,”

But caution still prevailed on Friday.

“Despite October’s notoriety as a ‘bear market killer’ and a favorable intraday move, investors should maintain a degree of caution. A real trend change requires a shift in fundamentals. And these changes are still not easy to identify,” Kuptsikevich said.

Rick Rieder, chief investment officer for fixed income at BlackRock, told MarketWatch’s Christine Idzelis that Thursday’s swings marked one of the “craziest” days in market history, after data showed U.S. inflation running at a faster-than-expected pace.

“One of the largest intraday reversals in recent memory from a closely watched CPI print underscores the extremely oversold condition and sentiment in this market. The vulnerability was not in the number, the vulnerability was in the position that led to the number,” said Jeff deGraaf, founder of Renaissance Macro Research, in a Friday note.

BlackRock’s Rieder advised investors to consider parking their money in short-term bonds, a point recently echoed by hedge fund legend Ray Dalio.

Shares of JPMorgan Chase & Co.
JPM,
+3.55%
was up 2.7% after the bank and Dow component beat Wall Street targets for earnings and revenue.

Analysts were also weighing results from Wells Fargo & Co.
WFC,
+3.61%
and Morgan Stanley
MS,
-4.21%,
and Citigroup Inc.
C,
+1.49%.

See: JPMorgan profit falls but beats estimates as Wells Fargo misses

Investors also followed developments in the UK, where Prime Minister Liz Truss sacked Kwasi Kwarteng from the role of Chancellor of the Exchequer. British government bond yields rose after Kwarteng presented a budget plan that included major tax cuts in late September, triggering a crisis that required the Bank of England to step in with an emergency purchase program.

Read: Why Kwasi Kwarteng could not survive the battle with the Bank of England

British bond yields fell first on Friday on indications that many of the planned tax cuts would be reversed. But they later rose after Truss only reversed corporation tax cuts.

See also: Larry Summers says UK debt market stress could be the ‘tremor’ signaling global economic ‘earthquake’

The Federal Reserve must continue to raise interest rates, but should be cautious about the pace of those moves, Kansas City Fed President Esther George said Friday.

Companies in focus

• Wells Fargo WFC,
  +3.61%
  shares rose 3.8% after the bank had higher-than-expected earnings for the third quarter, which offset a miss in earnings.

• Shares in Morgan Stanley MS,
  -4.21%
  fell 4.5% after the investment bank missed Wall Street’s earnings and revenue targets amid a drop in deal activity.

• Citigroup C,
  +1.49%
  shares rose 1.9% after the bank topped Wall Street forecasts for earnings and revenue.

• UnitedHealth Group Inc.
  UNH,
  +1.77%
  Shares rose 1.6% after the Dow component and health insurer reported third-quarter earnings and revenue that beat expectations, lifting its full-year outlook for the third consecutive quarter.

• Kroger Co.
  HR,
  -5.28%
  announced a $24.6 billion purchase agreement Albertsons Cos. Inc.
  ACI,
  -7.35%.
  Under the terms of the merger agreement, Kroger will purchase all outstanding shares of Albertsons’ common and preferred stock for an estimated $34.10 per share. Kroger shares fell 4.9%, while Albertsons was down 7%. Shares of Albertsons jumped more than 11% Thursday on reports of a potential deal, while Kroger rose 2%.

• Beyond Meat Inc.
  BIND,
  -5.89%
  shares fell 6.2% after the plant-based food company issued an earnings warning, announced a plan to cut about 200 workers and said it was cutting other costs as it makes a strategic shift aimed at achieving cash-flow positive operations.

See also: Beyond Meat COO Douglas W. Ramsey is leaving the company after being suspended for allegedly biting a man’s nose