S&P 500 Forecast: Israel-Palestine conflict keeps a lid on index

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.

S&P 500 FAQs

What is the S&P 500?

The S&P 500 is a widely followed stock price index which measures the performance of 500 publicly owned companies, and is seen as a broad measure of the US stock market. Each company’s influence on the computation of the index is weighted based on market capitalization. This is calculated by multiplying the number of publicly traded shares of the company by the share price. The S&P 500 index has achieved impressive returns – $1.00 invested in 1970 would have yielded a return of almost $192.00 in 2022. The average annual return since its inception in 1957 has been 11.9%.

How are companies chosen to be included in the S&P 500?

Companies are selected by committee, unlike some other indexes where they are included based on set rules. Still, they must meet certain eligibility criteria, the most important of which is market capitalization, which must be greater than or equal to $12.7 billion. Other criteria include liquidity, domicile, public float, sector, financial viability, length of time publicly traded, and representation of the industries in the economy of the United States. The nine largest companies in the index account for 27.8% of the market capitalization of the index.

How can I trade the S&P 500?

There are a number of ways to trade the S&P 500. Most retail brokers and spread betting platforms allow traders to use Contracts for Difference (CFD) to place bets on the direction of the price. In addition, that can buy into Index, Mutual and Exchange Traded Funds (ETF) that track the price of the S&P 500. The most liquid of the ETFs is State Street Corporation’s SPY. The Chicago Mercantile Exchange (CME) offers futures contracts in the index and the Chicago Board of Options (CMOE) offers options as well as ETFs, inverse ETFs and leveraged ETFs.

What factors drive the S&P 500?

Many different factors drive the S&P 500 but mainly it is the aggregate performance of the component companies revealed in their quarterly and annual company earnings reports. US and global macroeconomic data also contributes as it impacts on investor sentiment, which if positive drives gains. The level of interest rates, set by the Federal Reserve (Fed), also influences the S&P 500 as it affects the cost of credit, on which many corporations are heavily reliant. Therefore, inflation can be a major driver as well as other metrics which impact the Fed decisions.

Earnings of the week

Tuesday, October 10 - PepsiCo (PEP)

Thursday, October 12 - Fastenal (FAST), Delta Air Lines (DAL), Walgreens Boots Alliance (WBA), Domino's Pizza (DPZ)

Friday, October 13 - UnitedHealth (UNH), JPMorgan Chase (JPM), Wells Fargo (WFC), BlackRock (BLK), Progressive (PGR), Citigroup (C)

What they said about the market – Marko Kolanovic

Marko Kolanovic, JPMorgan's Chief Market Strategist & Head of Global Research, reiterated his earlier call for a possible 20% pullback in the S&P 500. Kolanovic said that higher interest rates are beginning to lead to a higher ratio of auto loan and credit card delinquencies. This gives the downside for the index a larger range, while the upside appears to have a cap for the remainder of the year.

"So then we look at sort of upside versus downside. Could there be another five, six, seven, percent upside in equities? Of course. But if there is a downside, it could be 20%.”

S&P 500 forecast

The S&P 500 index is doing better than many predicted at the start of the week. If the market dropped a full 1% here on Monday, few would bat an eye. As it stands, however, Monday’s market is holding on to much of Friday’s rally, which came off of the major beat of analyst consensus for September’s Nonfarm Payrolls. This higher jobs number showed that the US economy is still extremely robust despite higher interest rates.

The previous week showed that there seems to be some general support at 4,220 since four sessions in a row made lows around that level. Since Friday’s rally broke above the 9-day Simple Moving Average (SMA) quite aggressively, the first time in about three weeks, we could be getting hints that the two-month downtrend will soon be over.

From there, bulls will watch the 21-day SMA at 4,355, as well as the descending top trendline that ties the range highs on July 27, September 1 and September 14 together. The trendline is about 110 points above the 21-day SMA at the moment.

S&P 500 daily chart

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