Tech Earnings Are Key to Stock Market Navigating Trump’s ‘October Surprise’

Stocks suffered their biggest single-day decline since April last week. The stakes are even higher now. (Courtesy NYSE)

Key Points

• President Trump’s tariff escalation on Chinese goods led to the S&P 500 and Nasdaq Composite’s biggest single-day declines since early April.
• Markets previously recovered from tariff-related slumps due to strong tech earnings, a pattern investors hope to see repeated this month.
• Analysts project S&P 500 collective profits to rise 8.8% from last year, with information technology and communication services contributing 35%.

Investors looking for symmetry in Friday’s selloff and the tariff related slump they had to endure last spring are likely to find some comfort in the two events that brought markets back to life and laid the foundation for this year’s record-setting rally.

President Donald Trump’s surprise escalation of trade war rhetoric with China last week and the threat of an additional 100% tariff on goods imported from the world’s second-largest economy hammered stocks on Friday.

Both the S&P 500 and the tech-focused Nasdaq Composite suffered their biggest single-day declines since early April, and wiped out all of the October gains for each of the two major benchmarks.

However, much like during the tariff-related tumult from last spring, which lopped 12% from the S&P 500 in less than a week, markets have found support from the same person who triggered the chaos in the first place.

“Don’t worry about China, it will all be fine,” the president declared in a social media message on Sunday, suggesting that the U.S. could reach an agreement on myriad outstanding issues with its biggest trading partner.

That calm assurance appears to have convinced investors to return to the market, with stock futures pointing to solid early gains, but the real test will likely come later this week and into the end of the month.

Last spring, when markets wobbled amid the renewed trade uncertainty, stocks regained their footing through a series of better-than-expected March quarter earnings reports from the megacap tech names.

The S&P 500 reclaimed its pre-Liberation Day lows following robust outlooks from Microsoft and Meta Platforms , both of which were tied to investments in artificial intelligence, and extended those gains thanks to Amazon and Nvidia .

Investors are likely to see a similar pattern this month, with Wall Street’s biggest banks kicking off the third-quarter earnings season this week, and Big Tech following up later in the month.

“Earnings sentiment is at a critical juncture for the biggest market cap names in the S&P 500,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets in a note published Sunday.

Analysts see collective profits for the benchmark rising 8.8% from last year to around $573 billion, according to LSEG data, with the information technology and communications services sectors contributing around 35% of the overall earnings tally.

“The biggest market cap names in the S&P 500 and the tech sector have been carrying a heavy earnings burden for the S&P 500, and if earnings sentiment for these parts of the U.S. equity market fade, we think it will be difficult for the S&P 500 to avoid a near-term pullback,” Calvasina warned.

Whether tech can ensure that markets hold their gains into the final months of the year is an open question, however, given both the sector’s rich valuations and the questions over AI investment spending that have emerged over the past few weeks.

Issues surrounding the strength of the U.S. economy, masked by the lack of data being published during the federal government shutdown, remain notable. The collapse of auto parts supplier First Brands earlier this month has also raised concerns over the health of the corporate debt markets.

A big increase in China tariffs, meanwhile, could stoke inflation pressures and challenge the market’s assumptions on Federal Reserve rate cuts, a key plank in the market’s bullish outlook.

And, of course, the fate of U.S.-China trade talks remains both unknown and extremely risky heading into the expiration of the uneasy detente between Washington and Beijing on Nov. 10.

“Hawkish advisors on both sides of the Pacific will undoubtedly be using the current spat as an opportunity to try to lock in deeper U.S.-China decoupling,” said Julian Evans-Pritchard, head of China Economics at Capital Economics.

The market’s end-of-year run may rely on whether tech earnings can overcome that suddenly long list of October surprises.

Write to Martin Baccardax at martin.baccardax@barrons.com