U.S. equity markets ripped higher to start the week, continuing the trend that has been in motion for the past several weeks as the mega-cap stocks rallied around 5% or more, pulling all indexes higher. The energy sector was the only non-participant in today's rally as oil prices fell given the resumption of production on the Gulf Coast. The S&P 500 and the Nasdaq are now just 2% lower than their all-time highs, while the Dow Transports continue to push higher.
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Shares of Apple and Amazon rose 6.3% and 4.7% as both behemoths have big consumer events this week. Apple will reveal the long-awaited iPhone12 at a launch event tomorrow and Amazon kicks off its global two-day Prime Day tonight. It is expected to generate around $10 billion in sales. Nice haul work for a couple of days' work.
Corporate earnings season kicks into high gear tomorrow as the big banks lead the reporting season. Their margins have been compressed as interest rates have fallen, but it's their predictions for the future that we care most about. Their recent past has been rough.
Earnings season is finally upon us and expectations are rising for better than expected results for the third quarter. Analysts, on estimate, expect earnings to rise 5% from the second quarter, which was disastrous, and be 20% lower from the same period a year ago. That said, upward revisions for earnings are also on the rise, climbing 5% from three months ago. That's the largest earnings revision since the first quarter of 2018.
Where's the Strength?
The strongest earnings revisions have been in the energy sector, thanks to higher oil prices in the third quarter, and the consumer discretionary sector, which has been on fire lately. If those sectors, along with other cyclical sectors like industrials and manufacturing, report better-than-expected results, sentiment will stay with stocks.
What's the Risk?
Just about everything, but mostly these three things, according to Ryan Detrick at LPL Financial:
- COVID-19: How much did it disrupt operations, and how long until business is back to full speed? What would a resurgence mean for their bottom lines?
- The Elections: Investors are handicapping the potential regulatory and tax implications of a Biden win and a blue wave.
- Will the Winners Keep Winning? If technology firms and the mega-cap companies report strong earnings growth and robust guidance, the rest of the market can ride in their wake.
So Why is Everyone So Quiet?
Companies are being pretty tight-lipped about their future forecasts, which kind of makes it hard to pin down their growth. Over 170 S&P 500 companies have suspended earnings guidance since the pandemic, half of which have been in the consumer discretionary and industrials sectors.
In their defense, it's hard to model out growth forecasts if you don't know whether the coronavirus will still dominate our lives in the next six to 12 months, so why put out a prediction they can't control?