CIO View

Corporate earnings to drive markets in the near term

When ECB President Christine Lagarde cut interest rates by 25bps last Tuesday, she emphasized that the European Central Bank (ECB) was still ‘data dependent’, not ‘data point dependent.’ Her tone betrayed a slight discomfort with the fact that people don’t tend to use the Latin singular ‘datum’ anymore but that Latin grammar should make the ECB’s position quite clear that it will consider several data points before taking any future rate cut decision.(1) The data providers obliged and since then we have generally had a sting of bullish economic data, including the better-than-expected U.S. retail sales last Friday.(2) Unsurprisingly, the S&P 500 made another record high.

Stocks weren’t just driven by good economic data last week. The earnings season began on a strong footing, with banks generally reporting resilient earnings and pointing to a strong U.S. consumer. This was augmented by a strong showing from the world of content streaming, which added to the already bullish sentiment for the tech sector. Is this bullishness overdone?

We will know more as the earnings season progresses. There’s some time before all tech giants report, but there will be one from the electric vehicle space this Wednesday which will be keenly watched. Apart from earnings, there is a slew of economic data that will test investor optimism. This includes jobless claims figures due on Thursday and the University of Michigan Consumer Sentiment survey slated for Friday.

Near-term market behavior is likely to be guided by earnings, but if one were to look for the broad direction, there’s no dearth of risk factors that can dampen the mood. Irrespective of the outcome of U.S. elections, an escalation of trade confrontation between the two largest economies in the world seems to be gaining in probability. One side of the political spectrum has been more vocal and has expectedly threatened escalation using tariffs. But the four-year record of the other side has shown that it may not act very differently, even if it isn’t so loud in making such assertions. The troubling consequences of a disruption in trade for global economic growth haven’t gone unarticulated. Kristalina Georgieva’s point(3) that China’s exports are ‘no longer a minor factor in global trade’ sounds quite obvious, but whether her suggestion that the country shift away from an exports-led model is being taken seriously isn’t quite clear. Nor is it clear whether her worries about rising debt levels globally will lead to any mitigating action. As such, her point about an ‘unforgiving combination of low growth and high debt’ doesn’t seem to be unreasonable. None of these points are new but the IMF’s reminder should lead to some rethink among investors, especially the cautious ones, as USD 100 trillion of global public debt is a figure that is rather hard to ignore.

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1. Source: The European Central Bank, October 17, 2024.

2. Source: U.S. Census Bureau, October 17, 2024.

3. Source: CNBC, October 18, 2024.

Forecasts are based on assumptions, estimates, views and hypothetical models or analyses, which might prove inaccurate or incorrect. Past performance is not a reliable indicator of future returns. Source: DWS Investment GmbH as of 10/21/24.