Stocks mixed. Earnings have been mostly good. Just avoid technology


New York
CNN business

Recession worries remain on Wall Street. A key indicator in the bond market is signs of a potential downturn.

The spread between short-term 3-month Treasury yields and the benchmark 10-year yield briefly reversed on Tuesday. This means that shorter-term bond yields were higher than longer-term bonds. Both are currently around 4%.

This is a bad sign – and often precedes recessions – because it shows how nervous investors are. Typically, short-term bonds have much lower yields because investors expect to pay higher yields to borrow money over a longer period of time.

Another key yield curve, the spread between 2-year and 10-year Treasuries, has steadily inverted since early July after briefly reversing in March.

However, stocks have rallied in October despite continued concerns about buoyant global inflation, a strong dollar hurting multinational companies and political and economic turmoil in the UK. Much of the optimism comes from investors hoping the Federal Reserve will soon begin to slow the pace of interest rate hikes.

But there is another reason. Corporate earnings have been really, really, really good, to quote “Curb Your Enthusiasm’s” Larry David. Simply moving away from the once red-hot tech sector.

Google owner Alphabet ( GOOGL ) and Microsoft ( MSFT ) disappointed investors with their latest forecasts on Tuesday. Chip giant Texas Instruments ( TXN ) and streaming music company Spotify ( SPOT ) also took a nosedive on Wall Street.

All four stocks were down on Wednesday. And that’s a big reason the Nasdaq was down 1.8% in midday trading, even as the broader market held up relatively well. The Dow rose more than 60 points, or 0.2%, while the S&P 500 gained just 0.5%. But the Dow rose more sharply on the day, and the S&P 500 was also briefly in the green.

Advanced technology (ie FAANG stocks as they were named before the ticker changes) make up a large portion of the S&P 500’s weighting. Investors are now awaiting news from the likes of Facebook-owned Meta Platforms, which is due to report earnings. closing bell on Wednesday, and Amazon (AMZN) and Apple (AAPL) announced Thursday afternoon.

Weakness in technology is lowering earnings forecasts for the broader market. According to data provided to CNN Business by John Butters on Wednesday morning, analysts are forecasting earnings growth of just 0.6% for the S&P 500 in the third quarter. That was down from estimates of 1.5% on Friday.

Wall Street predicts a decline in earnings in the technology and communications services sector.

“I still don’t love technology. There are not many values. These companies are no longer skyrocketing,” said Brian Frank, chief investment officer of Frank Funds.

Look beyond technology, and there are many more bright spots to be found on Corporate America’s report cards.

Credit card giant Visa ( V ) (and a Dow component) reported earnings and revenue that beat analysts’ expectations, and the company also boosted its dividend. Kraft Heinz ( KHC ) posted strong results Wednesday morning, sending its stock higher. That good news comes on the heels of strong results for GM ( GM ) and Coca-Cola ( KO ) on Tuesday morning.

There are many parts of the economy that are still doing well. Along these lines, FactSet data shows that analysts expect double-digit percentage growth in earnings for consumer discretionary companies, industrials and real estate companies. And profits in the energy sector are expected to more than double this year, thanks to rising oil prices.

Two other encouraging signs? Nearly three-quarters of S&P 500 companies that have reported earnings so far have topped forecasts. (Profits lose, of course, more attention on Wall Street).

What’s more, demand seems to be holding up for many companies. Revenue is expected to grow 8.6% in the quarter, according to FactSet. Therefore, weaker profits are more dependent on a significant slowdown in sales than higher costs.

“Overall, earnings are doing well given the environment,” said Max Wasserman, senior portfolio manager at Miramar Capital.