Earnings season has kicked off this week with major banks due to release the inner workings of their balance sheets. Coming up; JPMorgan Chase & Co., Citigroup Inc., Bank of America Corp. and Wells Fargo & Co will report their third-quarter performance.
Earnings growth is expected to be robust, while trading revenues will be capped by low volatility.
The corporate tax revamp will possibly aid equity appreciation. Wall Street’s proxy, the S&P 500 is expected to cap the quarter off with a 5% growth in earnings, although that’s a decrease from the double-digit growth we saw in the first two quarters of the year.
We’ll see the impact of recent natural disasters creep into this quarter’s earnings results. However, investors will discount this slowdown as a transitory effect of the hurricanes. Therefore, a reduction in earnings could have limited impact on equity valuations.
There are reports that companies have pitched weak earnings forecasts so the actual result will look more robust when compared. This story has driven investors to plunge bullish bets into equities in anticipation that the companies will easily beat these forecasts. Although, it’s important to note, earnings outperformance does not necessarily solidify gains for stocks.
Utilities and energies will play a part in earnings this quarter, thanks to the recent rise in oil prices, exploration and production companies have left rigs turned on. Therefore, we could see energy stocks report strong earnings. Again, the natural disasters will have an impact here, as many refiners were disrupted and demand for oil fell, weighing on prices.
Tech-stocks have cooled off over the summer after a terrific start to the year. The industry has dominated stock markets and if earnings miss expectations, we could see a big overall sell-off in the stock market.
Old fashioned technologies will have a harder time, more digital-oriented technology will show more resilience. For example, Netflix could come under pressure, while google and oracle could do quite well.
More recently, financials have been driving the bullish sentiment in the market. Expectations of higher US interest rates has helped to support the industry.
The “lend long and borrow short,” means banks, brokers, and money managers are mostly beneficiaries of a rise in the cost of borrowing. Insurance companies in particular, have a linear relationship with interest rates. Luxury goods or discretionary stocks could also rally as interest rates rise, as it is traditionally a signal that wage growth is robust. Although, that is the worry, wage growth has been stagnant and inflation, underwhelming. So, in reality, these stocks could decline.
Additionally, ‘Trumpflation’ has played a part in the swollen valuations of not only financials, but the wider stock market. Promises of increased spending on infrastructure and a re-write of the US tax code have pushed stocks higher.