The Biggest Week of Earnings Season

Week in Review

In recent weeks, bond yields (and mortgage rates) have been on the rise, interrupting the stock market's six-week streak of gains. This movement can be attributed to a combination of factors, including stronger-than-expected economic and inflation data, shifting expectations of Fed policy, and concerns over U.S. debt and the upcoming election.

Despite the volatility and potential for temporary overshoots, we do not anticipate a significant and sustained rise in yields. This is due to several factors, including the continued resilience of the economy and a gradual removal of restrictions by the Fed as the labor market and inflation cool next year. Additionally, a likely split Congress will limit the potential for new fiscal initiatives.

It is worth noting that the stock market's recent gains have been supported by favorable underlying fundamentals, such as decreasing recession probabilities and positive financial market signals. While there may be some market turbulence, we believe that the current rise in yields is occurring for the right reasons.

Given these factors, we recommend taking advantage of any market volatility to capitalize on opportunities in both equities and fixed income. On the fixed-income side, investors can potentially lock in high yields for longer periods by repositioning into intermediate- and long-term bonds, while cash rates are expected to follow the Fed's policy rate lower over the next several years.

The macro data provided additional evidence for the soft-landing narrative as October's flash PMIs surprised to the upside, with the services sector showing further expansion and the level of new business reaching its highest point since April 2022. Initial claims also fell to their lowest level in nearly a month, reflecting a positive trend in the labor market. Furthermore, the Beige Book reported that economic activity remained stable in most districts.

We believe that the recent pop in rates, despite a recent rate cut, is a head fake by the markets. It is also an opportunity for investors to exit cash and enter longer duration bonds. The math is simple, bonds yield close to 5% coupon and a 1% cut in rates will provide an additional 5% price return.

The consumer resilience theme was supported by the latest weekly spending update from Bank of America. According to the report, total card spending per household increased by 1.9% year-over-year in the week ending October 19th. This growth was widespread, indicating a strong and healthy level of consumer spending. This is further reinforced by the fact that there have been three consecutive weeks of inflows to US equities, reaching almost $300 billion year-to-date, despite a recent trend of investors pulling out of the tech sector.

The third-quarter earnings season has also been a positive factor for market sentiment, with companies surprising on the upside by almost 6% in aggregate. Tesla's stock saw a significant increase of over $150 billion in market capitalization on Thursday, following a positive earnings report and 2025 outlook, which includes expected growth in deliveries of 20-30%.

In terms of individual companies, UPS also reported better-than-expected earnings, driven by strong revenue and margins in its domestic package sector. This news caused the stock to rise over 5% on Thursday. Additionally, Texas Instruments noted a potential bottoming out in the industrial sector, which has seen eight consecutive quarters of decline and a decrease of over 30% from its peak. Finally, staffing company Robert Half reported an improvement in business confidence levels and an increase in contract staffing orders, indicating a positive outlook for the industry.

Economic & Earnings Calendar

Next week will be a busy one for investors as the biggest week of third-quarter earnings season and the final batch of economic data before the Federal Reserve's November meeting takes place. Meanwhile, the U.S. election continues to loom over the markets, with early voting already open in several states.

Over 150 S&P 500 companies are scheduled to report their earnings in the coming week, following Tesla's impressive earnings report earlier this week. Among them are major players such as Alphabet, Amazon.com, Apple, Meta Platforms, and Microsoft. With Tesla setting the bar high and most of the group currently trading at elevated valuations and experiencing strong gains this year, expectations are certainly high.

We have many client names reporting this week. Google is priced to move 6% when it reports earnings, as is Eli Lilly. Apple and Microsoft are both expected to have a 4% move upon earnings.

The week will kick off with earnings reports from Ford Motor and Waste Management on Monday, followed by Advanced Micro Devices, Alphabet, Chipotle Mexican Grill, FirstEnergy, McDonald’s, PayPal Holdings, and Pfizer on Tuesday.

Wednesday's highlights will include Caterpillar, Coinbase Global, eBay, Eli Lilly, Meta Platforms, and Microsoft. On Thursday, attention will turn to reports from Amazon.com, Apple, Comcast, ConocoPhillips, Intel, Mastercard, and Uber Technologies. Finally, Chevron and Exxon Mobil will close out the week with their earnings reports on Friday.

Aside from earnings, the economic-data highlight of the week will be Friday's jobs report for October from the Bureau of Labor Statistics. Expectations are for a gain of 108,000 nonfarm payrolls, following a 254,000 increase in September. The unemployment rate is predicted to remain unchanged at 4.1%. On Tuesday, the BLS will also publish the Job Openings and Labor Turnover Survey for the last business day of September.

Additionally, on Wednesday, the Bureau of Economic Analysis will release its advance estimate of third-quarter gross domestic product, providing insight into the health of the economy. Thursday will bring the personal consumption expenditures price index for September, which will shed light on consumer spending and inflation.

The setup for this week will be interesting as we have a key jobs and inflation report this week before next week’s election and Fed meeting on further rate cuts.

Chart of the Week: Electricity consumption of Data Centers vs. Selected Countries

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.