Earnings Help Get The S&P 500 Near 3,000 Again

Stocks Rally On Earnings

Bank stocks helped lift the overall market higher because of the steepening yield curve and their good earnings reports. I’ll review the earnings reports later in this article. S&P 500 was up 1% to 2,996. It is back near its favorite spot which is 3,000. It hugged 3,000 for much of September. This was 4th time in about 6 months that the S&P 500 rallied from being down at least 4% from its peak to within 1%. That’s the most attempts in such a short window ever. Stocks have been range bound near the top.

It would be surprising to see a breakout without a trade deal. However, there is now an opening because the trade negotiations will last 3 weeks and earnings season is starting now. If earnings season is good in the next 2 weeks, a new record high can be reached before trade talks conclude. I’m expecting a negative end to them. Obviously, if trade talks go well, stocks will rally. That on its own could cause a record high if earnings season doesn’t move stocks either way. 

Sector Breakdown: Healthcare Drives Market Higher

On Tuesday, every sector rallied except consumer staples and utilities which fell 0.4% and 0.3%. Consumer staples were brought down by the declines in Proctor & Gamble and Colgate Palmolive which fell 2.4% and 1.5%. This was a rare losing day for P&G as it is up 28.4% year to date. It reports on the 22nd. Financials were winners as this sector rose 1.33%.

2 best sectors were healthcare and communication services which rose 1.76% and 1.62%. Healthcare sector was boosted by United Healthcare which had its stock rise 8.16% on an earnings beat. This stock has been the poster child for firms impacted by Warren’s rise in the polls. Everything can change for this company if Medicare for All is passed as it eliminates private insurance.

This big rally can easily be eliminated in the next few months. 3 polls came out on Tuesday. The NY race is tied between Warren and Biden. In South Carolina, Biden is up by 24 on Sanders. In Maine, Warren is up by 12 points over Biden. The chart below shows Warren has better odds of winning the presidency if she wins the nomination than Joe Biden does. The situation has likely changed since the debate.

Yield Curve Steepening

Recently, the long bond yield has risen while the short yield has stayed low because the Fed is expected to cut rates later this month and potentially again in December. Even with the 3 basis point decline on Wednesday morning, the 10 year yield is at 1.74% which is 21 basis points above where it was on October 8th

2 year yield is at 1.59% which is 17 basis points above where it was on the 8th. A main difference between the two yields is 15 basis points. As you can see from the chart below, the difference between the 10 year yield and the 3 month yield has gone positive after being -50 basis points this summer. I’m not expecting a recession this year or in the first half of next year even if the curve steepens further.

Personally, I actually think it’d be good news for the curve to steepen because the 10 year yield predicts nominal GDP growth. A rising long bond yield and a low short bond yield means the rate cuts are expected to work and improve nominal growth. The curve steepens when increased growth estimates don’t make the Fed less dovish. There is still a 75.4% chance of a cut in 14 days. Now, I’m not 100% cure if nominal growth will rebound. But that’s what the market has recently started to price in.

JP Morgan Rises On EPS & Revenue Beat

There is no earnings recession as I expected. With 36 firms reporting Q3 results, 83% have beaten estimates on 3.21% growth and 61% have beaten sales estimates on 3.59% growth. JP Morgan was one of the firms that beat EPS estimates as it reported $2.68 which beat the consensus of $2.45. Profits were up 8%. Revenues were also up 8% as they came in at $30.1 billion which beat estimates for $28.5 billion. This all lead the stock to rise 3.01%.

CEO Jamie Dimon stated, “The consumer remains healthy with growth in wages and spending, combined with strong balance sheets and low unemployment levels. This is being offset by weakening business sentiment and capital expenditures mostly driven by increasingly complex geopolitical risks, including tensions in global trade.” This is exactly in line with the University of Michigan consumer sentiment report.

Citigroup Also Beats EPS & Sales Estimates

Now let's review the earnings reports (Goldman Sachs & Wells Fargo). Citigroup reported great results just like JP Morgan. It reported EPS of $1.97 which beat estimates by 2 cents and revenues of $18.6 billion which beat estimates for $18.545 billion. This all helped its stock rise 1.4% on Tuesday.

Rate cuts hurt net interest margins which were 2.56% which missed estimates by 10 basis points. Even though net interest income missed estimates by $510 million, fixed income, currency, and commodities trading revenue beat estimates by $121 million. Branded credit cards revenue was up 11% in North America which speaks to the health of the consumer.

Conclusion

S&P 500 is very close to its record high. More good earnings reports can cause it to break the high as the trade war remains in limbo. I’m not expecting a breakthrough on trade. 

Undoubtedly, we will get more news on trade in the coming weeks. Tuesday was a solid day for earnings as Citigroup, JP Morgan, United Health, Goldman Sachs, and Wells Fargo stocks all rallied after they reported their results.

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