Markets Face New Challenges as Government Shutdown Averted, Debt Ceiling Looms

Late on Saturday, President Joe Biden signed a temporary extension to prevent a government shutdown, ensuring the government will remain open for a few more weeks. Although this averted an immediate crisis, it raises concerns about the confidence in the country’s financial stability. The next funding deadline is set for November 17th, just before Thanksgiving, which could potentially lead to a sell-off in stocks.

In the near-term, the markets will be influenced by two unrelated factors: the upcoming Federal Reserve meeting and the upcoming earnings season. The Fed meeting, scheduled for the last week of October, may provide clues about a potential interest rate increase. Rising oil prices and persistent inflation are factors that could prompt the Fed to consider this move.

However, another rate hike could negatively impact businesses with significant debt, such as Carnival Corporation. Goldman Sachs chief US strategist David Kostin warns that higher interest costs could weigh on corporate profits for the remainder of the year and into 2024.

The upcoming earnings season is also expected to present challenges. Consumer spending patterns appear to be shifting, with consumers choosing more affordable options and cutting back on discretionary expenses. Airlines have issued profit warnings, and department stores have reported that consumers are unable to pay their credit bills on time.

According to FactSet data, 64% of S&P 500 companies have issued negative earnings per share (EPS) guidance for the third quarter, which is higher than the five-year average of 59%. This indicates that companies are facing unexpected challenges and may need to adjust their valuations.

Despite these uncertainties, the government avoiding a shutdown provides temporary relief. However, concerns remain about the long-term impact of recurring debt ceiling dramas on market confidence and the US credit rating.