Big banks kick off the US earnings season
Asian equities and commodity markets kicked off the week on a strong note, with Chinese technology shares rallying on easing concerns about China’s crackdown on internet companies. The weaker yen, which tested the lowest levels since December 2018 against the dollar, provided a solid boost for Japanese stocks and aviation stocks in Singapore soared after authorities announced that more travel lanes will open. Oil continued to make new highs this morning, with Brent crude approaching $84 and WTI trading at a seven-year high near $81.
The positive sentiment in Asia does not seem to be shared in the US as equity futures edged lower in early trading. The disappointing employment report on Friday is not expected to delay the Fed’s tapering plan which most are scheduling for the November 3 FOMC meeting. Policymakers are set to announce a reduction in asset purchases given higher energy prices, continued supply chain bottlenecks and rising wages that will keep inflation levels elevated more than previously thought.
The US Senate approval to extend the debt ceiling until December removed one of the imminent risks for a delay to tapering, but that wasn’t enough to take stocks to new highs. It’s the third-quarter earnings announcements that will determine the direction of stocks from here.
Investors have high expectations for “Corporate America” and as we learned from the last earnings season, profits and revenues need to beat by considerable margins for the rally to resume. This week, big banks will kick off the earnings season with JP Morgan, Bank of America, Citigroup, Morgan Stanley and Goldman Sachs all announcing results.
Overall, earnings are estimated to grow 27.6% for S&P 500 companies but we should expect growth to be well above 30% given the positive surprises. That should lower current valuations and indicate that growth in profitability is taking the driving seat rather than higher valuations, when it comes to equity prices.
Traders should also keep a close eye on this week’s US economic data. Wednesday’s release of consumer price inflation for September is expected to show a monthly rise of 0.3% compared to August, keeping the annual price increase above 5%. It will be interesting to see how higher energy prices are impacting other areas of the economy. Friday’s US retail sales report will also be of great importance following a mixed jobs report and the expiration of various fiscal measures.