S&P 500 Forecast: Israel-Palestine conflict holds index gains at bay

• S&P 500 gained 0.48% last week on account of Friday’s furious rally.
• Friday’s Nonfarm Payrolls report for September led to 1.2% gain for index.
• S&P 500 futures dropped 0.75% in Monday’s premarket.
• Oil (WTI) rises 3.8% on Monday to $86 per barrel.
• Pepsico, JPMorgan, Citigroup, Domino’s Pizza and Delta Airlines report earnings this week.

The S&P 500 index is expected to close lower on Monday after global financial markets are concerned following Saturday’s Hamas attack on Israel. The worry is not just that Israel’s reaction could lead to a wider regional conflict, but that Oil prices will remain elevated and choke off growth. Already WTI has risen 3.8% on Monday to trade near $86 per barrel, just a week after oil price were beginning to descend from their perch atop $90/barrel.

Bristol-Myers Squib (BMY) has agreed to purchase Mirati Therapeutics (MRTX) for $4.8 billion. Bank of America cut its rating and price target on Datadog (DDOG). A host of banks issued their first coverage of ARM Holdings (ARM). Price targets ranged from $60 to $70 on the semiconductor company’s newly issued shares.

Besides Oil prices and headlines out of Israel, this week the S&P 500’s performance will largely hinge on the soft start of the third-quarter’s earnings season. Next week is when things really push into high gear, but this week will see a flurry of important companies reporting. Those include JPMorgan (JPM), Pepsico (PEP), Domino’s Pizza (DPZ), Wells Fargo (WFC), UnitedHealth (UNH) and BlackRock (BLK). 

The S&P 500 opened on the week down 0.45%, which was expected. S&P 500 futures had already started the premarket session down 0.75%. The more risk-prone NASDAQ Composite has sold off 1% at the same time.

S&P 500 News: Worries focus on whether Israel conflict expands

On Saturday morning, waves of Hamas fighters launched a surprise attack on Israel, mainly coming from part of the Palestinian territories known as Gaza – an urban enclave sandwiched right next to the Egyptian border to Israel’s south. Already hundreds of civilians are dead on both sides. It was one day after the 50-year anniversary of the Yom Kippur War in 1973.

That is important, because the United States’ backing of Israel in that conflict half a century ago led to the Arab Oil Embargo, which caused the high Oil prices that spurred on a decade of extreme inflation.

The US Congress is already formulating an aid bill for Israel, so the markets are worried that US involvement could trigger further geopolitical ramifications for the Oil market. Oil prices are rising on Monday, but analysts predict without Israel’s conflict with the Palestinians expanding to include other international players Oil prices will likely not get out of hand. 

That is a big “if” though. The Wall Street Journal reported over the weekend that the Islamic Republic of Iran had a hand in funding this operation by Hamas. If that turns out to be true, an Israeli strike against Iran could imperil Oil markets at a time when Iranian Oil output is expanding following the loosening of US sanctions. This is especially true if Israel takes aim at Iranian oil infrastructure.

"Markets will spend a fair amount of time in the early part of this week trying to understand the implications of the most serious cross-border attack on Israel in decades," Deutsche Bank's Jim Reid wrote in a note to clients.

Earnings season begins with major banks, consumer cyclicals

The third quarter ended in September, and so a few major stocks are already prepared to release their Q3 earnings results, although next week is when earnings season becomes official. This week it is mostly banks and large financial institutions, but also a few consumer cyclicals like Domino’s Pizza and PepsiCo, who are reporting.

On Tuesday, food and beverage giant PepsiCo will release Q3 data before the market opens. Wall Street analysts are split with eight analysts raising their earnings guidance and five trimming their forecasts. Consensus now calls for $2.15 in earnings per share (EPS) on revenue of $23.44 billion. This amounts to a 6.7% annual growth on the sales front and a 9.1% annual rise in earnings.

Domino’s releases their third-quarter results either Wednesday or Thursday before the bell. EPS is expected to rise 18.3% to $3.30 per share on sales of $1.05 billion. Unlike PepsiCo, analysts were nearly unanimous in raising their forecasts for the quarter on Domino’s. 

JPMorgan will release their fiscal Q3 results on Friday alongside most of the other financial institutions. All Wall Street analysts revising their earnings outlook for Q3 have raised their forecasts in the past 90 days. Consensus is now $3.87 in EPS on $39.3 billion in revenue. Both the top and bottom line are expected to grow more than 20% from a year ago.

The outlook has soured a bit more on money manager BlackRock, who also releases Q3 results before the market opens on Friday. Most analysts have cut their earnings forecasts for founder and CEO Larry Fink’s operation. The consensus call is for $8.47 in adjusted EPS on revenue of $4.56 billion.

UnitedHealthcare, the largest insurer in the US and one of the country’s 10 largest stocks by market cap, is expected to post adjusted EPS of $6.37 on revenue of $91.4 billion in Friday’s premarket.