What to Expect from the Earnings Season
The market saw a rally earlier in the week as a positive sign. This shows that buyers are interested in good deals, and that investors are not worried about another large decline.
It is also a good indication that the bounce occurred near 3,590, a critical support area on the S&P 500. It is clear that there are enough buyers in order to keep prices from falling.
As we have been stating for a while, third-quarter earnings are expected to be better than expected. And as long consumers are still spending, stock prices should remain at a strong floor. That’s how earnings season so far looks.
Although the situation looks positive so far we have to moderate our expectations. It is rare for a bullish rally lasting to this point to start with large reversals, like last Thursday.
This means that investors are uncertain and uncertainty is often discounted into market price. The current economic risks (inflation rising interest rates, slowing global economies) are severe enough to ensure uncertainty in the near future.
We think the market is stable enough right now, with the positives and negatives being balanced. This will help to prevent any large bullish breakouts.
We are currently in a gray area.
We have many things to look forward with earnings season in full swing
It’s still too early for bank earnings season to draw any conclusions. However, the reports from banks look very good. Actually, banks performed exceedingly well compared with expectations, if non-cash losses the banks had set aside next year to cover defaults on loans (if unemployment increases) were added back in.
The Bank of America Corp. report (BAC) is a good illustration of what we mean.
It is now at the highest point in 10 decades for net interest income. According to BAC management credit card spending increased by 13%. This is a positive because it is mainly used for leisure and travel, rather than essentials as some analysts had feared. The bank also reported that it had the second-lowest level of loan delinquency.
Inflation can be a problem for consumer expenditure, but the BAC reports backs our view that consumers have not been affected enough by it to make it a serious economic threat. This news only has one downside: as long as there is consumer demand, the Fed will continue increasing interest rates by selling bond and raising its overnight rate.
We do not believe the odds of a big support cut are high until there is further devaluation in consumer spending, corporate margins and other factors.
In the coming three weeks, two factors will probably determine whether or not the market stays within the channel (which would be what we expect) and if it breaks out to its downside…
Earnings season has picked up with tech companies beginning to trickle into the economy.
These reports will be a big help to investors before the Microsoft Corp., Apple Inc. AAPL, Alphabet Inc. GOOGL and Amazon.com Inc. (AMZN). Reports next week.
We expect tech firms in the future to sandbag (lower guidance for next quarter, which makes it more difficult to beat) during earnings calls. We don’t expect companies to point to a weaker dollar or ebbing international demand for slowing growth rates. It is what they think will matter most to investors.
The Federal Reserve Open Market Committee (“FOMC”) will almost certainly raise rates once more on Nov. 2.
The bond market is pricing in the likelihood of a 0.75% hike at 95%. Therefore, we can assume that traders have already considered this possibility.
We don’t yet know what the Fed chairman, and other governors, will say about the hike.
Recent FOMC members stated that there will be some debate whether to continue raising rates in 2023 at roughly the same pace as 2022. However, this was before the CPI Report, which exceeded all expectations.
Many analysts and traders are concerned that Fed members may adopt a more hawkish tone and less “debate,” which could have a negative impact on stocks. We think that the Fed is going to remain consistent for the time being, but this could be the most important wild card.
We think the negatives as well as the positives of the market are about equal.
Traders love clear black-and white answers. If market swings are making it difficult to feel happy, that is perfectly normal.
We plan on using strategies that are successful in a market with channeling. This could mean selling calls at resistance level and buying them back, as well as writing short puts on lows. We will update you as more data is received from earnings, Fed (Nov.2), and unemployment (4 Nov.4).
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