Key Takeaways

• Earnings Season Outlook
• Signals in the bond market
• Market volatility and specific sectors

Stocks rose nearly 1% across the board last week as earnings season kicked off and economic data continued to support hopes for a soft landing. If there is a potential canary in the coal mine, it is bonds, whose yields have risen at the long end of the yield curve and that could impact earnings. But first, let’s discuss earnings and the week ahead.

While most people don’t really start earnings season until the financials start reporting, we also reported on a handful of companies in addition to JP Morgan and Wells Fargo. Based on these reports and what is forecast, earnings are on a trajectory that would see a growth rate of just over 4%. However, there is a major caveat to this.

According to FactSet, actual profits have exceeded estimates in thirty-seven of the past forty quarters. In fact, reported profits were almost 7% higher than predicted. So if history is any guide, gains for the S&P 500 will likely be closer to 7%, and it’s that 7% figure that will likely serve as the so-called “whisper figure” we often hear about.

While the index’s overall earnings growth matters in terms of fundamental valuation, it will be just as important to listen to what companies have to say going forward. Forward-looking statements are always critical, but this quarter in particular we could see nuanced guidance with hedged wording based on the election outcome.

Looking at this week’s economic calendar, I don’t see any report or reports that are likely to move the markets much. However, Fed members speak every day except Wednesday. In the wake of the release of the minutes of the most recent Federal Reserve Open Market Committee (FOMC) meeting last week, I am looking for clues for the next meeting, scheduled just two days after the election. And that brings us back to bonds.

When analysts talk about the yield curve, they are talking about interest rates over different time periods. Traditionally, longer-term bonds offer higher returns than shorter-term bonds because money is tied up for a longer period. We are coming from a situation where the curve was inverted for an extended period of time. This means that shorter-term investments earned more interest than longer-term investments. That happens when markets are nervous about the current environment. The curve has now ‘normalized’, but interest rates on the long side have not only recovered, but also increased slightly. That indicates less concern about the short term, but greater concern as we move forward in time.

At the beginning of today’s column, I hinted at how the bond situation could impact earnings. With long-term rates rising, I wonder if we’ll hear concerns from companies when discussing future guidance. The bond market is expressing some hesitation, and I want to see if CEOs express similar concerns.

This week we hear about the profit calendar of a number of companies from the financial sector. Bank of America, Citigroup, Goldman Sachs and Schwab all report for Tuesday’s opening, along with Walgreens. Later in the week, on Thursday, we will hear from Netflix. At Netflix, there have been a number of calls for a price increase, despite the streamer recently raising prices and reducing password sharing.

For today, with the bond market closed for the holidays, I don’t expect stocks to do much. These types of days, while rare, are often quiet with low volume. If there are two things I’m looking at today, it’s the VIX and casino stocks. Despite the markets having a good week last week, it is worth noting that volatility is up 6% this week. That could be due to anything from revenues to elections, but it’s worth keeping an eye on. And then a new leader was elected in Macau this weekend. One of his initiatives is to reduce the number of American companies that own and operate casinos. Several casino stocks are trading lower in the premarket. As always, I would stick to your investment plans and long-term goals.