US earnings season heats up and everything you need to know this week

The first three quarters of the year were a standout for US stocks. Despite the threats from high interest rates, rising geopolitical tensions, and lofty valuations, the S&P 500 delivered its best performance so far this century, up around 21%.

Now, before the summer, you might’ve said the gains were all due to the AI frenzy, with Big Tech’s stocks driving most of the markets’ jump. But that explanation doesn’t wash anymore. In the third quarter, less buzzy sectors like utilities, real estate, industrials, and financials led the way, each climbing over 10% and leaving tech in the dust. And with interest rates coming down and expected to fall further, borrowing-sensitive sectors like utilities and real estate may have further to rise. With market gains spreading across industries and the economy still holding its own, the outlook for stocks seems rosier than it’s been in a long time. It’s no wonder the big US indexes are hitting new records.

Of course, companies will now have to live up to the hype. Expectations are through the roof – not just for tech, but also for defensive sectors like consumer staples, healthcare, and utilities, all of which have seen their valuations soar. Investors will want proof these companies can deliver before they double down, hoping for more market gains.

And in that sense, this week’s earnings could provide some clues about what stocks do for the rest of the year. Watch for what the big banks say about loan quality and credit risks. Keep an eye on consumer trends from companies like Johnson & Johnson and Procter & Gamble. And pay close attention to signs that lower interest rates might be boosting corporate guidance and profits. Optimistic signals from banks and rate-sensitive industries would suggest even brighter days ahead for the stocks.

It’s worth noting that risk can sometimes be higher when markets appear stable. Recently, Wall Street’s fear gauge (the VIX) has edged up, even as stocks remain elevated. In Europe, stocks have approached all-time highs but haven’t quite broken through yet, which may signal caution. While this doesn’t mean the rally is over, it’s a gentle reminder to stay mindful of potential risks even when sentiment is strong.

On The Calendar 

• Monday India inflation (September).
• Tuesday Eurozone industrial production (August), France inflation (September), UK employment (September). Earnings Bank of America, Citigroup, Goldman Sachs, Johnson & Johnson, UnitedHealth.
• Wednesday UK inflation (September), Italy inflation (September). Earnings Abbott Laboratories.
• Thursday ECB interest rate decision, US retail sales (September), US industrial production (September), Japan inflation (September), China economic growth (Q4), China industrial production and retail sales (September). Earnings Blackstone, Morgan Stanley, TSMC, Netflix.
• Friday US housing starts (September), UK retail sales (September). Earnings American Express, Procter & Gamble, SLB.

What You Might’ve Missed Last Week

US

• US inflation rose more than expected, suggesting a tricky final mile.
• A new hurricane tested catastrophe bond investors’ resolve.

Asia

• The excitement around China’s big stimulus plans showed signs of fading.

UK

• One in seven UK business leaders would consider relocating operations abroad if taxes increase.
• A survey found that British business confidence declined in the third quarter due to concerns over taxes and geopolitical risks affecting investment.
• British sports supplements maker Applied Nutrition confirmed its plans to list on the London Stock Exchange later this month.
• The job market cooled in September, with pay growth at its slowest rate in nearly four years.
• The UK now relies on European electricity imports during peak demand after closing its last coal plant.
• Borrowing costs have surpassed Germany’s by the widest margin in a year.

Why It Matters

US consumer prices jumped more than expected in September, up 2.4% from last year. Housing costs helped drive the hop, but even the so-called core measure – which excludes more volatile things like food and energy – was peppier than forecast. The three-month core annualised inflation rate actually ticked higher. This doesn’t necessarily mean inflation is making a strong comeback, but it does suggest that the final phase of controlling it might be a bit challenging. As a result, the Federal Reserve may have a careful decision to make in November and “only” cut 25 bps.

Catastrophe bonds (Cat bonds), known for their attractive yields as long as weather conditions remain favourable, have been quite popular this year. Insurance companies, expecting an active hurricane season, issued a record number of cat bonds, and investors showed strong interest, especially after these assets gained 20% last year. While Hurricane Milton initially raised concerns of a potential 15% loss, it ultimately wasn’t as severe as anticipated, and the impact is expected to remain in the single digits. 

Business confidence in the UK is currently navigating some uncertainty due to discussions around potential tax adjustments aimed at addressing a £22 billion budget gap. Some business leaders are exploring their options in light of these changes. The labor market is experiencing a gentle slowdown, with more moderate pay growth, which may prompt the Bank of England to consider further interest rate adjustments. Additionally, the evolving tax landscape has led to higher UK borrowing costs, reflected in the widening gap between UK and German bond yields.

Simultaneously, the UK’s transition away from coal power has increased its reliance on electricity imports, bringing risks against the backdrop of persistently high energy prices and potential gas supply volatility. Households continue to struggle with elevated energy bills, which could further weigh on consumer confidence and spending. On a brighter note, the initial public offering (IPO) market shows some signs of life. Applied Nutrition’s planned listing on the London Stock Exchange signals renewed interest in stock investments, even though the UK trails behind other European markets in IPO activity.

Important Information

This publication has been produced with Finimize. As with all investing, your capital is at risk. Forecasts are never a perfect predictor of future performance, and are intended as an aid to decision- making, not as a guarantee. This publication does not contain and should not be taken as containing, investment advice, personal recommendation, or an offer of or solicitation to buy or sell any financial instruments. Prospective investors should seek independent financial, tax, legal and other advice before making an investment decision. 

Your capital is at risk. If you choose to invest, the price and value of any investments and any income from them can fluctuate and may fall. So you may get back less than the amount you invested. Past performance is not a guide to future performance.