/perspectives/weekly-viewpoint/earnings-take-center-stage

Earnings Take Center Stage

The major market indices finished higher for a third straight week as a solid start to third quarter earnings season and signs the labor markets continue to improve outweighed concerns about inflation and supply-chain disruptions that threaten the post-pandemic economic recovery.

October 25, 2021    |    By Michael Schwager

Performance for Week Ending 10.22.2021:

The Dow Jones Industrial Average (Dow) finished up 1.08%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.58%, the Standard & Poor's 500 Index (S&P 500) gained 1.64% and the Nasdaq Composite Index (NASDAQ) tacked on 1.29%. Sector breadth was positive with 10 of the 11 S&P sector groups closing higher. The Real Estate sector (+3.22%) led the gains followed by Health Care (+2.87%) and Financials (+2.79%).

Index* Closing Price 10/22/2021 Percentage Change for Week Ending 10/22/2021 Year-to-Date Percentage Change Through 10/22/2021
Dow 35677.02 +1.08% +16.57%
Wilshire 5000 47281.85 +1.58% +19.83%
S&P 500 4544.90 +1.64% +21.00%
NASDAQ 15090.20 +1.29% +17.08%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 10/18/21 – 10/22/21

The major market indices finished higher for a third straight week as a solid start to third quarter earnings season and signs the labor markets continue to improve outweighed concerns about inflation and supply-chain disruptions that threaten the post-pandemic economic recovery. The Dow, S&P 500 and Wilshire all posted new record highs during the week. Last week, the Labor Department reported that initial jobless claims in the week ended October 16 fell 6K to 290K, the lowest level since the pandemic began in March 2020. On the earnings front, third quarter earnings season is off to a stronger than expected start, helping to ease concern that persistent Covid cases and rising input costs would derail the profit recovery. Through Friday, 117 members of the S&P 500 have released results with just over 81% surprising to the upside. Aggregate earnings are up over 46% on a year-over-year basis, solidly ahead of the 32% growth rate that analysts are forecasting for the overall quarter.

Tapering on Tap: Late last week, Fed Chairman Powell opened the door to tapering at the upcoming FOMC meeting by stating; “We are on track to begin a taper of our asset purchases that, if the economy evolves broadly as expected, will be completed by the middle of next year,” Powell said during a panel discussion at a virtual event hosted by the South African Reserve Bank. The Fed's quantitative easing program seems to have run its course and central bankers are cognizant that bond buying activity is not an elixir for things like the semiconductor chip shortage, the energy crisis in Europe or the global labor shortages. While markets are likely to view the official tapering announcement as the first step towards higher interest rates, Powell has been clear that tapering should not be viewed a timing tool for rate hikes. Ultimately it will be how the data shakes out in the coming months/quarters that will determine the timing of interest rate hikes. While there will likely be a kneejerk reaction lower on the tapering announcement, the Fed's the action should be viewed as confirmation that they believe the economic recovery is durable and it also shows they are cognizant of the risk of inflation and are ready to tackle it. Ultimately, these efforts should prove reassuring for investors.

Beige Book Offers a Neutral Assessment of the Economy: Last week's Beige Book report suggested that growth has slowed somewhat during the fall months. The report, which is based on surveys of business contacts by the Fed's 12 regional banks and will be the playbook for discussion when central bank officials next meet at the November 2-3 Federal Open Market Committee (FOMC) meeting. According to the report, “U.S. economic growth slowed to a modest to moderate rate this fall as firms confronted supply-chain disruptions, elevated prices, a shortage of available workers and fears around the Delta variant of Covid-19. Many businesses said they expected higher prices and supply shortages to last another year or so.” The survey also said that vaccine mandates are contributing to labor market turnover: “employers across the U.S. are struggling to attract and retain talent, and in some areas, vaccine mandates have made it even more challenging to hold onto workers. The central bank said vaccine mandates were ‘widely cited’ as contributing to high labor turnover, along with child-care issues and Covid-related absences.”

Bullish Narrative Intact: As we look out over the remainder of the year, our positive view on the equity market remains intact. While volatility is likely to remain elevated and the pace of gains will probably slow slow through the end of the year, we feel the macro environment will remain supportive and should continue to provide a sturdy backbone for additional upside. Although the US economy has recently shown some signs of slowing, growth in the quarters ahead is still expected to remain elevated. The US consumer is in good shape and savings rates are well above pre-pandemic levels, suggesting that as consumers become more comfortable with the economic recovery, pent up demand will be unleashed. Earnings expectations also suggest solid forward growth. Based on consensus expectations from Bloomberg, earnings are forecast to grow by over 45 percent this year followed by about 8.35 percent growth in 2022 and just under 10% in 2023. With the markets recently moving back to all-time highs, a period of consolidation cannot be ruled out. However, if we were to see a drawdown in the weeks/months ahead, we would view it as an opportunity to increase equity exposure.

The Week Ahead: Third quarter earnings will take center stage this week with over 155 members of the S&P 500 scheduled to release results. Amongst this group will be ten components of the Dow Jones Industrial Average. It will be a busy week on the data front with all eyes focused on the initial release of the third quarter GDP report on Thursday. As highlighted above, the Beige Book report underscored that growth has moderated in recent months. According to Bloomberg, third quarter GDP is expected to decline to +2.6%, well off the blistering pace of 6.7% growth during the second quarter. The Atlanta Fed's GDP Now forecasting model suggests there could be some downside risk, with the model forecasting growth of only +0.53%. Other data reports of interest include; September new home sales, October consumer confidence, durable goods orders during September, jobless claims, September personal income/spending and the University of Michigan final reading on October consumer sentiment. The Fed speaking calendar will be nonexistent as Fed members enter into the pre-FOMC blackout period.

The Week Ahead: As we enter the first full week of Q4, markets will have plenty to keep them occupied over the course of the week. The focal point of the data calendar will be the September payroll report on Friday. This report will be watched very closely, since it will be the last payroll report ahead of the November 2 & 3 FOMC meeting. The prior months report underwhelmed, so a strong report could lead to the central bank announcing a tapering of its bond buying activity. According to the consensus forecast from Bloomberg, nonfarm payrolls are expected to rise by 450K while the unemployment rate expected to dip to 5.1% from 5.2% during August. Other economic reports of interest include; August factory orders, the September ISM Services report, and weekly jobless claims. The earnings calendar will remain muted with only 5 members of the S&P 500 scheduled to report results. The Fed speaking calendar will be relatively light with just a handful of Fed heads scheduled to speak.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.




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