CA-EN Institutional
CA-EN Institutional
This week with Sadiq

What to Expect from Q4 Bank Earnings

November 28 to December 2, 2022
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Market Recap

  • The S&P 500 rose 1.5%, led by utilities, materials and financials.
  • Rate-sensitives gained alongside another drop in 10-year Treasury yields, down another 15 bps.
  • Meantime, the TSX rose 2.0%, with all but health care in on the gains.

Bank Earnings

With another round of bank earnings just around the corner, what can investors expect to see? Over the past few weeks, inflation has come down and the U.S. Federal Reserve is expected by some to pivot to a less aggressive stance, prompting markets to perform relatively well—even with an inverted yield curve. There is optimism that this will not be a long-lasting recession, and that pressure on the consumer from inflation and interest rates will ease. Even if this outlook proves to be overly optimistic, we still expect good results from the banks, with decent earnings and attractive dividend yields. It’s uncertain whether we will see dividend increases, however, as banks wait to see how steep the economic slowdown will be. Trading revenues could be down due to declining markets in September and October, but we are seeing a bit of a pickup on that front as we head into the holiday season.

Bottom Line: Bank earnings will likely be decent, though it remains unclear when we’ll see a more significant economic slowdown.

Economic Shocks

A railroad strike now appears possible in the U.S., joining COVID-related supply chain issues as potential areas of concern. Our evaluation, though, is that it won’t have much of an impact. Supply chains have been improving for some time. With Black Friday having just passed, we’ve been following the retail space very closely, and the overall sentiment seems to be that the supply chain problems that plagued last year are now well behind us. Even a recent uptick in COVID numbers in China isn’t a major concern, because supply chains have been improving elsewhere, and the country’s zero-COVID policy appears to be somewhat less strict than previously. On the consumer side, the big difference between last year and this year is that in 2021, consumers were willing to spend because they were worried about product scarcity. This year, that’s not the case—there’s not the same pressure to shop in October because what you want may be gone by December. As a result, it’s likely we’ll see sales spread out a bit more across the latter part of the year.

Bottom Line: Expect major retailers like Walmart and Target to remain dominant this holiday season.

Fed Minutes

Last week, the Fed released minutes from their latest meeting, and as usual, investors are closely examining them for insights into the pace of future rate hikes. Our evaluation is that they don’t indicate anything significantly different than what we’ve been hearing from the Fed for a while. They’ve said that it’s time to moderate the pace of rate increases—but that doesn’t mean that they think inflation is under control. It merely means that they want to see the rate hikes that they’ve already implemented have time to take effect. Some investors seem to be taking the optimistic view that once rate increases stop, the Fed will begin to cut rates. Thus far, there is no messaging to support that position. Unless we see a harder-than-expected recession, interest rates are unlikely to decline until 2024.

Bottom Line: Fed messaging indicates that we’re likely past peak inflation, but it’s unclear how sticky inflation will remain on the way down.


Lately, we’ve been having some great conversation about where markets will be at the end of the year. We believe that a rally is likely, which is why we’ve been reducing our underweight position on equities and increasing our U.S. allocation. Thus far, these calls have proven correct. Energy in particular is a sector that has held up fairly well despite declines from its peak, and its strength can be expected to continue into 2023. However, we recognize that this rally is not necessarily driven by fundamentals, and our overall outlook is that the economy will likely weaken as we enter the new year. With that in mind, we’ve sold call options, and used those premiums to buy an out-of-the-money put—essentially trading off some of our upside to buy ourselves some protection on the downside. Sometimes, economic uncertainty requires creative solutions, as this case shows.


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