Q3 earnings season is set to kick off, with several large banks reporting this week. Earnings have been the dominant theme of the U.S. markets this year, with earnings growth driving market returns year to date, while valuations have actually contracted. One of our big calls coming into the year was that companies would emerge from the pandemic stronger and more profitable than ever. This has come to fruition in earnings and operating margins as more revenue growth has filtered down to the bottom line. The operating margin for the S&P 500 is 14.4%, a multi-decade high and above the 10-year average of 12.8%. Even if some of these cost pressures weigh on margins and they don’t continue to expand, that doesn’t mean they will necessarily weigh on the market. How data comes in relative to expectations is important for markets. If margins outperform consensus estimates, they could still be a positive catalyst for the market.
While markets will focus on earnings, they will also have one eye on the Fed. Fed vice chair for supervision Randal Quarles’ term expires on Wednesday. Vice chair Richard Clarida’s term ends in January and chair Jerome Powell’s term ends in February. There is also a vacant seat on the board of governors and two regional Fed presidents recently resigned. With the potential for several new leaders to come in, markets will be watching to see what this means for the future of monetary policy. If more policy “doves” are added to the Fed’s leadership, it could potentially change the expected path of interest rate hikes over the next few years. More dovish Fed policymakers would likely be more hesitant to raise rates until they see more progress on the employment front.
A look back
- Global equities finished the week in positive territory with emerging markets leading the pack, followed closely by stocks in the U.S. International developed markets also eked out gains for the week.
- Congress and the White House kicked the can down the road on the debt ceiling, passing legislation to extend the debt limit until early December.
- U.S. nonfarm payrolls came in at 194,000, missing the consensus estimate of 500,000. However, private payrolls were strong and there were upward revisions to the prior two months.
A look ahead
- With Federal Reserve (Fed) vice chair for supervision Quarles’ term ending on Wednesday and the resignation of two regional Fed presidents, market participants will be focused on who will be filling the positions and their impact on the overall views of the Federal Open Market Committee.
- Q3 earnings season is set to kick off this week as several large banks are set to report results.
- Economic data: NFIB Small Business Optimism, Consumer & Producer Price Indices, Retail Sales, Empire Manufacturing, FOMC Meeting Minutes.
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