- Banks exceeded earnings expectations with strength attributable to asset management and advisory revenue with an extra boost as they released reserves held aside for potential pandemic losses. Consumer financial health remains stronger than it has been in years but that has yet to translate into meaningful loan demand.
- We are now in the peak of earnings season with 70% of S&P 500 earnings due to be released over the next three weeks, with three trends expected to emerge. 1.) Profit margins are expected to remain high but likely narrowing due to cost and supply chain pressures. 2.) Guidance of above versus below consensus earnings estimates has narrowed. It remains very positive but is reverting towards longer-term averages with less dispersion among estimates as the cycle matures. 3.) Dollar strength could provide an additional source of strength to large multi-national corporations.
- The recent spike in 2-year Treasury yields to 0.39% and the resulting flattening of the yield curve are notable, but longer-dated maturities still may not fully reflect the fact that higher inflation expectations could be stickier than previously thought and that longer yields have upside.
- Small cap U.S. stocks remain very attractive from both a valuation and earnings standpoint. This underscores our recent upgrade to this segment as does the argument that smaller companies, who are more dependent on U.S. sales, could be a direct beneficiary from unlocking current supply chain constraints.
A look back
- Global markets notched solid broad-based gains last week. All 11 S&P 500 sectors were positive, reflecting expectations for the continuance of a robust earnings season which began last week.
- 2-year Treasury yields have seen a notable spike in the last week. The 10/2 yield curve has flattened by 0.14% as market participants have begun to handicap short-term yield expectations.
- Crypto assets added to their recent froth with unchecked enthusiasm around China’s waning influence and hopes for regulatory clarity.
A look ahead
- Earnings reports accelerate for the next three weeks, with this week’s focus on the materials and communication services sectors.
- Fed officials fan out this week with 14 planned speeches supporting the recent Fed meeting minutes, which signaled a tapering announcement at the November 3 FOMC meeting.
- Economic releases: Industrial Production, NAHB Housing, Housing Starts, Fed Beige Book, Existing Home Sales, Markit Manufacturing & Services, and the Leading Index.
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