As The Clash sang: “One day it’s fine and next it’s black.” Investors have been buffeted in recent days by contradictory trends. One day investors are bullish, the next…despondent.

As of market close October 28, the blended year-over-year third-quarter 2022 earnings growth rate for the S&P 500 is 2.2%. The percentage of S&P 500 companies reporting a positive earnings surprise are below their five- and 10-year averages. Trading this month has been volatile.

Stoking bearish sentiment have been generally disappointing Q3 earnings results from mega-cap technology bellwethers, with worrisome forward guidance.

Alphabet (NSDQ: GOOGL), Amazon (NSDQ: AMZN), Apple (NSDQ: AAPL), Meta Platforms (NSDQ: META), and Microsoft (NSDQ: MSFT) cumulatively account for 20% of the S&P 500 index, and for the most part, their Q3 performance surprised on the downside. On average, their stocks fell 9% on the day of their earnings release. The outsized influence of this tech quintet generates risk for passive investors.

But supporting the bull case have been falling bond yields and increasing expectations of a Federal Reserve pause in tightening. What’s more, the industrials have put in a solid performance that’s a tailwind for the overall market. We’re seeing a tug-of-war right now between Silicon Valley and the “old economy.”

Read This Story: The Old Economy’s Q3 Performance: Revenge on The Nerds

Hence the dichotomy in the market’s performance. Last week, all of the major stock market indices surged, in the U.S. and overseas, in a broad-based rally. However, the Dow Jones Industrial Average soared 5.7% and the tech-heavy NASDAQ advanced a more modest 2.2%, with much of the latter’s rise attributable to biotechnology (see chart).

A salient theme is the continuing weakness in online advertising spending, as companies trim their ad budgets due to economic uncertainty. That’s been a major headwind for technology and communication services.

Another problematic trend is the strength of the U.S. dollar, which undercuts the profitability of U.S. companies that generate a major portion of their revenue in foreign currencies. Indeed, technology companies are disproportionately hurt by this currency differentials because they obtain nearly 60% of their revenue from abroad.

Bright spots for the U.S. economy are a robust jobs market and a consumer that’s still spending, although this spending has been transitioning from goods toward services. Strong earnings from payments services firms such as Visa (NYSE: V) highlight the tenacity of consumer spending, despite elevated inflation and rising interest rates. That said, lower income consumers have been pulling back on discretionary spending, with an emphasis on discount items.

Leading components of inflation have eased and we’re probably approaching a peak in wage growth. The Fed’s tightening already is weighing on rate-sensitive sectors of the economy, notably housing. Accordingly, the spread between the 10-year and 3-month Treasury yields turned negative last week for the first time since late 2019. This “yield curve” inversion underscores the efficacy of the Fed’s efforts to cool the economy, fueling hopes that the central bank will get less hawkish.

The week ahead…

Crucial reports on the economic docket this week include Chicago PMI (Monday); S&P U.S. manufacturing PMI, ISM manufacturing index, job openings, quits, construction spending, and motor vehicle sales (Tuesday); ADP employment report, Federal Open Market Committee (FOMC) announcement, and Fed Chair Jerome Powell’s press conference (Wednesday); initial jobless claims (Thursday); and non-farm payrolls, unemployment rate, hourly earnings, and labor force participation rate (Friday).

The biggest news this week will be the FOMC’s meeting and Powell’s press conference, when the Fed is expected to announce another 0.75% hike in interest rates.

There’s another pivotal event this week that you should watch…

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John Persinos is the editorial director of Investing Daily.

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