Watch Microsoft tonight; Texas Instrument outlook is denting semiconductor sentiment

On the macro front French business surveys for October shows the worst confidence in the manufacturing sector since Q1 2015 after being more stable than many other countries in Europe this year. It shows that the downside dynamics in the economy are spreading not turning around. Eurozone consumer confidence numbers (advance) for October are out at 14:00 GMT and is expected to decline a bit from the September reading. As with the US consumer, the European consumer is still quite confident given the clear signs of recession in the manufacturing sector which is most likely due to robust employment as the economic slowdown has still not started widespread layoffs among companies.

As the frequent reader of our equity updates knows we view the equity market with skeptical eyes as the levels do not fit the overall picture of US-China trade war, 20-month straight economic slowdown, recession in Germany and Sweden, and likely imminent negative profit growth. Wall Street Journal had a great article yesterday questioning whether global equities could be in a stealth bear market. Many equity indices have still not recouped the highs from January 2018 so S&P 500 flirting with all-time highs gives the indication of a strong market, but weakness is evident everywhere. In our Market Call podcast this morning we also discussed the fact that US leveraged loans are not bid indicating risk-off in the far corners of risky assets.

Otherwise all eyes today are on Caterpillar (CAT:xnys) reporting Q3 earnings at 10:30 GMT where analysts are expecting the first negative revenue decline y/y since Q4 2016. Caterpillar is also always an interesting company to follow as its large exposure to Asia Pacific in the construction sector makes it a could indicator on economic activity.

Boeing (BA:xnys) is also reporting Q3 earnings before the US market open, but the time is unspecified, and this is a crucial release for the aircraft maker still embattled in a scandal around its 737 Max plane which a ruling in Indonesia overnight saying that it was Boeing’s faulty 737 Max design that was guilty in the Lion Air Flight 610 crash in October 2018. Any weak guidance will pose a significant downside risk for investors as valuation multiples are still rich given the issues around the 737 Max plane and the fact that revenue growth was -35% y/y in Q2 and expected to be -22% y/y in Q3. Yesterday, European aviation regulators also said that they will not necessarily follow an approval schedule from the US aviation regulator FAA which means that a global return to the skies for the 737 Max could extend well into 2020.

The most important earnings release today is from Microsoft (MSFT:xnas) reporting FY20 Q1 earnings tonight after the close with expectations looking for 11% revenue growth and 9% EPS growth which we believe should be achievable. Microsoft is the biggest component in the S&P 500 Index with a 4.2% weight. Shares are valued at the highest valuation multiple since 2004 so any miss against estimates would most likely be punished by investors and could dent overall sentiment in S&P 500.