
Earnings Optimism ‘Trumps’ Election and War Uncertainties
Investors are captivated by the third quarter US corporate results season which has started with a bang as nearly 80% of reports so far have beaten analyst expectations. Reason enough for the US market to hit another all-time high and deliver its sixth consecutive weekly rise.
Ahead of the November 5th Presidential election, the next two weeks see a deluge of reports and if progress is maintained, all the well-known market uncertainties may be brushed aside. These concerns range from the Ukraine/Russia war, rising Middle East tensions as Israel seems poised for a retaliatory move against Iran and the speed with which the Federal Reserve will cut interest rates (from 5%) to the projected 3.5% level late next year, or sometime in 2026?
On Monday, China’s Central Bank cut general and property lending rates by the expected 0.25% but the market is hoping for more action in the near term. Meanwhile, in the US, money markets imply that there is a 92% and 86% respective chance of a 0.25% cut at each of the Federal Open Market Committee meetings to be held in November and December.
The UK market is discounting the same quarter point cut on 7 November at their equivalent policy meeting, following last week’s reduction by the European Central Bank. The Bank of Canada also meet later today and are expected to announce a bigger interest rate cut. Whilst the Canadian economy grew at an annualised rate of 2.1% in the second quarter, the central bank’s governor Tiff Macklem has raised concerns over the downside risks to jobs, and the broader economy, from lower oil prices.
Part of the strength of US markets has recently come from opinion polls from the key seven ‘swing’ states that will determine the next President. The election pendulum has swung back gently towards Trump who is again the favourite to win, which in turn has bolstered the US dollar. His perceived borrow and spend policies could keep inflation and interest rates higher! Even the price of Bitcoin has surged on the back of the former President’s crypto enthusiasm.
Democrats are not exactly panicking but they would have been encouraged by Taylor Swift’s army of ‘swifties’ doing everything possible to rally support for Kamala Harris. But will all those youngsters come out to vote?
Surprisingly good economic data, pointing to a continuation of growth rather than a soft economic landing, has also boosted investor sentiment. Retail sales have surpassed forecasts, employment conditions are stable and leading economic indicators are all pointing to moderate growth at a time of inflation close to target levels.
Turning to the real economy and corporate results, Netflix (shares up 11%) delivered operating income 7% above expectations, whilst good news on price increases, engagement and future advertising trends are set to lift profit margins. New subscribers were 5.1 million– a cool 1million above expectations with a seasonal strong Christmas quarter to follow.
American aerospace company, Boeing shares saw relief as it offered a 35% wage rise over four years to its striking employees. A ratification vote is due today but there is still no agreement or proposal on the question of pensions.
French luxury goods firm LVMH missed their numbers as weak Asian sales continued to weigh on earnings. Shareholders are ‘miffed’ with the shares now weaker by nearly a fifth since the start of the year.
In the week ahead, investors will be watching for Thursday’s US Purchasing Manager indices for both Manufacturing and Services – it will be interesting to see if they support the thesis of ongoing economic strength. Friday brings the latest in the volatile series of Durable Goods Orders and a Michigan Consumer Sentiment index which has recently been trending upwards.
(Cover Image Source: Jonathan Simcoe)