Stocks are mixed at midday on Tuesday, with the Nasdaq Composite and S&P 500 higher and the Dow Jones Industrials and Russell 2000 lower. Earnings reports are flooding in with a wide range of sector and industry representation. Individual stocks are moving on the results, while in the bigger picture, traders await Fed news that is due out tomorrow.

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With Government Shut, Earnings Dominate The shutdown of the U.S. federal government, which pundits claimed would be over in time to pay military personnel on October 15, was well into its third week as the market opened on 10/20/25. Both sides have dug in on the extension of the Affordable Care Act subsidies set to expire at the end of the year. The 'No Kings' protests of October 18 underscored the political divisions in the country and the difficulty in reaching resolution to the shutdown. The shutdown has left investors without key economic data, most notably nonfarm payrolls but also reports on inflation, personal income and outlays, housing starts and permits, industrial production, the trade balance, and more. The government will release one key data set, the consumer price index for September, given that it will figure within the cost-of-living-adjustment calculation used to set the increase in 2026 Social Security benefits. The CPI will be issued more than a week behind schedule on 10/24/25. The market has moved on to privately compiled and released data, which often includes diffusion and sentiment indicators such as small business optimism and consumer sentiment. However, these only partly substitute for the missing government data. Calendar 3Q25 earnings season is partly filling this void, and so far, it is sending an encouraging message. 3Q Earnings Off to a Strong Start Heading into the 3Q25 earnings season, analysts and investors were more optimistic than they were heading into 2Q25 season. Back in early July, consensus expectations were for low-single-digit 2Q25 EPS growth. Instead, S&P 500 earnings from continuing operations for 2Q25 increased in low double-digits. That sharp outperformance against expectations may have contributed to optimism heading into the 3Q EPS season. One month into the calendar third quarter, the bulk of tariffs kicked in. Whereas second-quarter earnings reflected positioning in advance of tariffs, third-quarter earnings will be directly impacted by tariffs on both nations and on product categories. So far, companies are using a range of strategies to mitigate tariffs, including selectively passing on higher input costs, seeking to localize supply chains, and reducing costs where possible. Tariffs are set to be in place for a long time, but so far, companies appear to be navigating this challenge with minimal damage to margins and earnings. The market is very early in the 3Q25 earnings season, and earnings data is both limited and skewed to one particular sector. With a little more than 10% of companies having reported quarterly results, the blended annual growth rate for calendar 3Q25 earnings is in the 8%-9% range. Blended earnings growth rates combine both actual results for companies that have reported with estimates for companies yet to report. Given that estimates tend to be based on conservative guidance, the final calculation of actual EPS growth for any quarter tends to be several percentage points above the blended estimate from early in the reporting period. As is always the case early in the reporting season, the Financial sector is dominating results for the period to date and earnings are up in high-teen percentages from 3Q24. Banks are benefiting from improved business confidence, which is leading to increased loan activity, higher M&A and IPO activity, and increased equity and fixed-income trading volumes. Relatively few Information Technology companies have reported, but the sector is forecast to report strong 3Q25 earnings growth. Three of the Magnificent 7 stocks are in the IT sector (NVDA, MSFT, AAPL). Two of the Mag 7 companies are in Consumer Discretionary (TSLA, AMZN) and two are Communication Services (META, GOOGL). In 2Q25, Mag 7 earnings collectively were forecast to grow in low- to mid-teens percentages; actual 2Q25 Mag 7 earnings growth was in the mid-20% range. Currently, consensus expectations are for Mag 7 earnings to grow in mid-teens, and Information Technology earnings to grow in the low-20% range on a year-over-year basis. Other sectors forecast to grow 3Q25 earnings more than the S&P 500 (and in many cases, in double-digit percentages) include Real Estate, Materials, and Industrials. Sectors expected to grow earnings less than the S&P 500 average include Consumer Discretionary, Healthcare, Consumer Staples, and Energy. Two sectors, Communication Services and Utilities, could potentially either beat or lag average index EPS growth. We will check in on 3Q25 earnings as the season progresses. Argus is modeling low-double-digit EPS growth for 3Q25. We also look for high-single to low-double-digit EPS growth for 4Q25, which will be reported early in 2026. Assuming 3Q and 4Q earnings growth is within our ranges, full-year 2025 S&P 500 earnings from continuing operations is on track for low-double-digit growth, in line with our forecast of $270. Diffusion, Sentiment Surveys Signal Caution In the absence of government data, economic releases from private sources have taken on extra weight. The University of Michigan consumer sentiment survey remained at 55.0% for October after falling to 55.1% in September from 58.7% in August. Sentiment was 70.5% a year earlier in October 2024. The Conference Board's Consumer Confidence Index fell to 94.2 for September from 97.4 for August. Within this series, the Expectations Index reading of 73.4 remained below the 80 threshold - as it has since February 2025 - that tends to signal a recession is ahead. The business community appears guardedly optimistic but frustrated by ongoing economic uncertainty, given the slowing jobs economy compounded by tariffs and the government shutdown. The ISM's manufacturing Purchasing Managers' Index (PMI) edged up to 49.1% in September from 48.7% in August and 48.0% in July. Purchasing managers report that contraction in new orders and in employment is being offset partly by higher production. ISM's Services PMI, however, unexpectedly fell from 52.0% for August to 50.0% for September. That put the Service PMI at the breakeven point between expansion and contraction for the first time since 2010. In the large Services category of Accommodations and Food Services, survey respondents complained of tariff impacts on food input costs. In the Construction sector, respondents worried that higher materials costs along with high mortgage rates were keeping would-be buyers sidelined. The NFIB Small Business Optimism Index slipped to 98.8 in September from 100.8 in August. The index remained above its 51-year average of 98.0 but is down from 105.1 in December 2024 (right after President Trump's election win). The Uncertainty Index for September rose sharply to its fourth-highest reading ever, according to NFIB Chief Economist Bill Dunkelberg. Another input for data-starved investors is 'Fedspeak' commentary from Fed governors. Fed Governor Christopher Waller, who is reportedly in line to replace Jerome Powell as Fed chairman, argued for a 25-basis-point rate cut in October in a speech at a Council of Foreign Relations meeting in New York. The newest Fed governor, Stephan Miren, argued for a more-aggressive approach to reducing rates without specifying a rate-cut timeline. Conclusion The government shutdown is a challenge for government employees who have now gone multiple weeks without being paid. It is becoming an issue for some citizens seeking information or services normally provided by shuttered government offices. Ironically, for the stock market, the shutdown may be a moderate positive. That's because nonfarm payrolls has not been reported. Amid the mounting enthusiasm from the positive earnings season, nonfarm payrolls is likely to be a 'rain on everyone's parade' data point, revealing the fragility of the employment economy. Once the government shutdown ends, investors will confront a wave of economic data, some of which may be in conflict with the cheery picture being painted by corporate earnings. The stock market rose fairly steadily from mid-April to the end of September, with just a late-July wobble ahead of early-August tariff implementation; that selling spasm tuned into a buyable dip. The stock market has been choppy in October, making little net progress in what is normally a strong market month. Performance across the remainder of the month could be dependent on resolving multiple issues, including reaching a trade deal with China and ending the federal government shutdown. Even if those issues remain unresolved, and assuming corporations continue to deliver 3Q25 earnings above already-high expectations, stock sentiment could remain strong heading into the holiday season and year-end.

Despite bursts of outperformance, small- and mid-cap stocks (SMID) have underperformed large-caps year to date -- as they have over the past five years. But they may be in a better position to generate market-beating returns going forward. SMID companies tend to focus on domestic markets, so their businesses could be less disrupted by the trade and tariff debate, or fallout from unrest in the Middle East, the Russian invasion of Ukraine, issues in China, or other geopolitical developments. As well, the prices of SMID stocks generally are lower than the prices of large-caps, with the P/E ratio on the Russell 2000 SmallCap Index at 20, compared to a trailing P/E above 26 for the S&P 500. Finally, there are long stretches in the record books when SMID stocks have outperformed large-caps. SMID stocks can be risky. But despite the risks, diversified investors look to have exposure to small- and mid-caps based on the long-term performance record.