Investors Focus on Third Quarter Earnings Season
And while every sector in the index gained on the week, the leadership showed a clear cyclical bias. Materials led the way with a gain of 5.1 percent, followed closely by energy and technology. The volatility index (VIX) fell to a level of 25 for the first time since late August.
Small Stocks, Eurozone Equities and Bond Yields Rose
As robust as the move was, small stocks were even stronger. The Russell 2000 index climbed 6.4 percent, bringing its surge off its September 23 low to 12.8 percent, but leaving it still 1.9 percent shy of turning positive on the year.
Eurozone equities rose 3.5 percent in dollar terms, as measured by the Euro Stoxx 50 index, reflecting the dollar’s weakness versus the euro. The Nikkei 225 index climbed 2.2 percent in dollar terms, and China’s CSI 300 index rose 3.5 percent, as the currency firmed.
Bond yields also rose. The ten-year Treasury note added seven basis points to 0.77 percent, its highest weekly close since early June. High yield credit spreads tightened for the second straight week.
Third Quarter Earnings Season Kicks Off this Week; Investors Watch for Economic Data
There wasn’t much economic news last week to account for the strength in equities and the rise in yields. In the U.S., the ISM service sector report was strong, but jobless claims showed further evidence of leveling off. And the minutes from the Fed’s September meeting contained little surprise. But this week may be a different story. In addition to both producer and consumer prices for September, retail sales and industrial production are on the calendar, as is preliminary consumer sentiment for October. All are expected to show some strengthening from the prior month. The bond market is closed on Monday.
Corporate earnings season begins this week. Since the start of the third quarter expectations have steadily improved, although they will certainly fall well below last year’s level. According to Factset, aggregate earnings are set to decline by 20.5 percent compared to last year, and they could be better than that. The Atlanta GDPNow model forecasts third quarter growth will top 35 percent. How meaningful a better-than-expected quarter for earnings will be remains to be seen, however. How confident company managements feel about the months ahead will likely be far more influential. According to the Business Roundtable, CEO confidence improved markedly in the third quarter, but remains below its level at the start of the year. The OECD Business Confidence Index for the U.S. is more optimistic, however, showing a rebound to levels that prevailed in 2018. The big banks kick things off this week and have something to prove. The KBW bank index is lower on the year by 30 percent. But even the banks have rallied in the past couple of weeks, climbing 6.4 percent last week and 5.1 percent the prior week, no doubt encouraged by the rise in bond yields.
Neither politics nor the coronavirus will be far from the headlines this week. Supreme Court nomination hearings will compete with election campaigning for the daily headlines, with now just three weeks to go before the election. But so will the virus, as Europe deals with a second wave, and daily infections in the U.S. have risen above 45,000.
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.
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An index is a statistical composite that is not managed. It is not possible to invest directly in an index.
Definitions of other individual indices mentioned in this article are available on our website at ameriprise.com/legal/disclosures in the Additional Ameriprise research disclosures section, or through your Ameriprise financial advisor.
Past performance is not a guarantee of future results.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a widely used measure of market risk. It shows the market's expectation of 30-day volatility. The VIX is constructed using the implied volatilities of a wide range of S&P 500 index options.
A 10-year Treasury note is a debt obligation issued by the United States government that matures in 10 years. The 10-year yield is typically used as a proxy for mortgage rates, and other measures.
ISM Manufacturing Index, which used to be called Purchasing Manager's Index (PMI), measures manufacturing activity based on a monthly survey, conducted by Institute for Supply Management (ISM), of purchasing managers at more than 300 manufacturing firms.The ISM is an index of the prevailing direction of economic trends in the manufacturing sector. The purpose of the ISM is to provide information about current and future business conditions to company decision makers, analysts, and investors.
The GDPNow forecasting model provides a "nowcast" of the official GDP estimate prior to its release by estimating GDP growth using a methodology similar to the one used by the U.S. Bureau of Economic Analysis. GDPNow is not an official forecast of the Atlanta Fed. It is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model.
The Business Roundtable is an association of chief executive officers (CEOs) representing the top corporations in the United States, who examine and advocate for public policy to foster vigorous economic growth and a dynamic global economy.
The OECD Business Confidence Index provides information on potential future developments, based upon opinion surveys on developments in production, orders and stocks of finished goods in the industry sector. Numbers above 100 suggest an increased confidence in near future business performance, and numbers below 100 indicate pessimism towards future performance.
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