Market Pulse

Market Pulse

October 25, 2021

Three key themes will continue to dominate the market narrative and drive performance in the week ahead –Earnings, inflation, and growth.

In focus

  • Earnings–Traders are readying themselves for a bustling calendar of fresh corporate earnings. Roughly one-third of U.S. companies in the S&P 500 index will report their Q3 results, led by major U.S. tech companies. Thus far, the earnings season is off to a strong start. More than 80% of reported earnings have exceeded analysts’ expectations. Year-over-year earnings growth is on track to rise 30-35%. While we expect equity returns to moderate relative to their strong performance thus far in 2021, strong earnings trends remain supportive of our constructive outlook for U.S. equities.

  • Inflation–On Friday, Federal Reserve (Fed) Chair Powell re-signaled the Fed is set to taper its asset purchases very soon on the basis of strong inflation and progress on the labor front. Over the past three days, Powell and Treasury Secretary Yellen have each warned that high inflation will persist well into 2022. As a result, traders are pricing in two full rate hikes in 2022. We believe this is premature and expect these hawkish bets to ease as supply chains reopen, labor shortages improve, and the Fed signals patience towards future rate hikes.

  • Growth–On Thursday, annualized Q3 GDP is expected to fall to 2.8% from 6.7% in Q2, as a result of supply challenges, labor shortages, and Delta fears. Our work suggests the summer slowdown is already giving way to stronger activity in Q4, which should put the recent stagflation debate to bed. Declining new Delta cases and strong U.S. PMI data inform our outlook for robust growth to close out the year.

A look back

  • Major U.S. equity indices set new all-time highs last week. The S&P 500 rallied 1.6% as the vast majority of U.S. companies beat third quarter earnings expectations. The S&P 500 is up 21% year-to-date.
  • Treasury yields rose decisively, with most pressure concentrated in the first 10 years of the yield curve. 10-year yields finished the week at 1.63%.
  • Fed Chair Powell reiterated the Fed’s plan to taper asset purchases soon but stay patient with respect to rate hikes. Treasury Secretary Yellen said she now expects strong inflation to persist through 1H 2022.

A look ahead

  • 30% of companies in the S&P 500 index will report Q3 earnings this week, led by tech giants AAPL, AMZN, FB, GOOGL, and MSFT. Other reports in focus –BA. CAT, KO, MCD, MRK.
  • Thursday’s first look at Q3 GDP will likely show an expected slowdown in growth as a result of supply chain disruptions, widespread labor shortages, and the spread of the Delta variant.
  • Economic releases: New Home Sales, Durable Goods Orders, U. of Mich. Sentiment, 3Q U.S. GDP, Personal Income, Personal Spending.

 

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