Earnings In Financials And Interest Rates

Key Takeaways

• Earnings Season Outlook
• Bond Market Signals
• Market Volatility and Specific Sectors

Stocks gained nearly 1% across the board last week as earnings season got underway and economic numbers continued supporting hopes for a soft landing. If there is a potential canary in the coal mine, it’s bonds, where rates at the long end of the interest rate curve have been climbing and that could tie into earnings. But first, let’s discuss earnings and the week ahead.

While most people don’t consider earnings season to truly kick off until the financials begin reporting, we have had a handful of companies report in addition to JP Morgan and Wells Fargo. Based on those reports and what is forecast, earnings are on a trajectory that would see a growth rate of just over 4%. However, there is a big caveat to that.

According to FactSet, in thirty-seven of the last forty quarters, actual earnings have exceeded estimates. In fact, reported earnings have been nearly 7% higher than forecast. Therefore, if history is any guide, earnings for the S&P 500 will likely come in closer to 7% and it’s that 7% number which will likely serve as the so-called “whisper number” we often hear about.

While the overall index earnings growth rate matters in terms of fundamental valuation, equally important will be listening to what companies have to say looking forward. Forward-looking statements are always key, but this quarter in particular we could get some nuanced guidance with hedged wording based on the election outcome.

In looking at this week’s economic calendar, I don’t see any report or reports that are likely to move markets much. However, we do have members of the Fed speaking every day except for Wednesday. In the wake of last week’s release of minutes from the most recent Federal Reserve Open Market Committee (FOMC) meeting, I’m looking for any hints about the next meeting, scheduled just two days after the elections. And that gets us back to bonds.

When analysts talk about the yield curve, they’re talking about interest rates over varying periods of time. Traditionally, bonds taking longer to mature offer a higher rate of return than bonds for shorter durations because money is being tied up for a longer period of time. We’re coming out of a situation where the curve was inverted for an extended period of time. That means, shorter term investments paid more interest than longer term investments. That happens when markets are nervous about the current environment. The curve has now “normalized” but the rates at the long end have not only recovered, they’ve kind of taken off. That suggests less concern about the near-term, but greater concern as we move out in time.

At the beginning of today’s column, I hinted at how the bond situation may tie into earnings. With long-term rates climbing, I am wondering if we are going to hear concerns from companies when discussing future guidance. The bond market is expressing some hesitation, and I want to see if CEOs express similar concerns.

This week on the earnings calendar, we’ll hear from a number of companies in the financial sector. Bank of America, Citigroup, Goldman Sachs and Schwab all report before the open on Tuesday, along with Walgreens. Then later in the week, on Thursday, we’ll hear from Netflix. With Netflix, there have been a number of calls for a price increase despite the streamer already having recently raised prices and cut down on password sharing.

For today, with the bond market closed for the holiday, I don’t expect equities to do too much. These types of days, though rare, are often quiet with low volume. If there are two things I’m watching today, they are the VIX and casino stocks. Despite markets having a good week last week, it’s worth noting volatility crept higher on the week by 6%. That could be a result of any number of things from earnings to the election, but it’s something worth monitoring. And then in Macao, a new leader was elected over the weekend. One of his initiatives is to reduce the number of U.S. companies that own and operate casinos. In premarket, several casino stocks are trading lower. As always, I would stick with your investing plans and long-term objectives.