All eyes on earnings

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 jobs report, which revealed the labour market added 254,000 jobs last month. 

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." 

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 says. “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 €55 billion 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.

Inflation keeps its cool

US Consumer Price Index data released on Thursday showed headline inflation fell to 2.4% in September, below August’s 2.5% annual increase but above forecasts of 2.3%. However, core inflation, which excludes volatile food and energy prices, remained elevated. The new figures show inflation is slowly closing in on the 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 25 basis points, and the tech-heavy Nasdaq Index moving in a similar fashion. Both indices were down roughly 10 basis points going into Thursday’s statement.

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. 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.