Fast reading:
- Earnings season is coming into view, with a number of large banks set to report.
- A hotter-than-expected inflation report cleared the way for another rate cut at the Fed’s November meeting.
As third-quarter earnings season gets underway, investors eagerly await company results for a view on how stocks on the S&P 500 have performed over the last three months, amid increased volatility. The case for a more robust US economy was bolstered last week by a stronger-than-expected US jobs report, which revealed the labour market added 254,000 jobs last month1.
Analysts had lowered their earnings expectations in the lead up to the report, explains Stephen Auth, Chief Investment Officer for Equities at Federated Hermes.
“Energy stocks have been a key culprit, though the downgrades there seem more to do with the decline in oil prices in the third quarter that now have corrected back up.”
“Large-cap pharma has also been hit, though these stocks tend to trade on forward pipeline developments than current earnings, and financials have seen downgrades due to the lagged effects of the Federal Reserve’s September rate cut, which hurts net interest margins temporarily then helps them later. Bottom line, most of the action this earnings season will hang on what companies say about the forward outlook,” he adds.
Bottom line, most of the action this earnings season will hang on what companies say about the forward outlook.
For the equities team, the focus is on net interest margin guidance as the rate cutting cycle gains momentum, as well as any indications of a deterioration in bank’s credit books.
“Our expectations are positive on both fronts”, Auth explains. “For big tech, we will be looking for evidence that the ‘AI revolution’ is making anyone, other than Nvidia, any money so far. Here, our expectations are more cautious.
“Elsewhere, we’ll be watching the industrials for evidence that the longstanding weak manufacturing PMIs are having any impact on profits, which so far, they haven’t. And overall, we’ll be looking to see if the improved earnings growth outside of tech that we’ve been expecting to begin to show signs of life in the third quarter actually happens. We’re optimistic. Net-net, we see the upcoming earnings season as market supportive, though not uniformly so.”
In Europe, meanwhile, the outlook for the region remains challenging with dispersions of likely returns within countries and sectors. European banks, however, provide one of the brighter spots.
“As we approach the midpoint of third quarter earnings, European banks continue to generate profits largely benefiting their shareholders. We are anticipating an estimated €55bn in capital distribution by the time we reach the end of the year,” says Filippo Maria Alloatti, Head of Financials for Credit at Federated Hermes Limited
“The inevitable shift in German monetary policy will impact sector valuations. The Euro Interbank Offered Rate (Euribor) curve is indicating potential risks to over €600bn in interest margin revenues by mid-2025, so management teams will be increasingly focusing on commission revenues.”
Inflation keeps its cool
US Consumer Price Index (CPI) data released on Thursday showed headline inflation fell to 2.4% in September – as seen in Figure 1 – below August’s 2.5% annual increase but above forecasts of 2.3%2. However, core inflation, which excludes volatile food and energy prices, remained elevated. The new figures show inflation is slowly closing in on the US Fed’s 2% target, and reinforced expectations that the central bank will cut rates again at its November meeting.
Markets reacted tepidly to the report, with the S&P 500 falling by roughly 25bps, and the tech-heavy Nasdaq Index moving in a similar fashion. Both indices were down roughly 10bps going into Thursday’s statement.3
Small caps, however, reacted strongly, with the Russell 2000 Index Futures falling nearly 70 bps in the half an hour after the report.
Figure 1: Headline US inflation continues its steady decline
Wheel of fortune
Elsewhere this week, China’s stock market indices slumped after government officials failed to follow through with a specific stimulus proposal, before rebounding again on Thursday ahead of this weekend’s press briefing with finance minister Lan Fo’an. On hopes of a market-moving announcement, the CS1 300 Index was up 1% on Thursday, while the Hang Seng Index closed up 3% after tumbling earlier in the week.4
At the end of September, officials announced a supportive stimulus package to help boost the flailing economy, initially inspiring confidence in investors who flooded back into Chinese stocks. However, optimism has waned as investors questioned the viability of the stimulus, and whether or not the government would do enough to boost consumer sentiment.
For further insights on markets, read our latest commentary from Stephen Auth, CIO, Equities.
BD014749