In this week’s update we’ll hardly mention the US Presidential election – you’ll get enough of that elsewhere. We’ll barely touch on vaccines and the virus, and we won’t spend any time on Boris Johnson’s lockdown misery, though we will talk about the impact on the Bank of England. Instead I want to focus on the Q3 reporting season where we learn just how well or badly companies in the US, and across the globe, fared in the last three months.
And of course, as far as equity prices are concerned, what matters is not how well or badly companies do in absolute terms, but rather how they do relative to expectations. Last quarter’s reporting season was an extreme illustration of this point. It was a disaster in absolute terms – earnings for S&P 500 companies fell by a third in the year to Q2. But that was much better than expected. Analysts had been expecting earnings to almost halve, so it was a shoot-the-lights-out result in those terms – one of the best ever.
This better-than-terrible result supported the S&P, which rose steadily from it’s low in early July until the peak in early September. Of course, lots of forces were at work but one of them was the outlook for earnings, which also improved on better economic data – again that means better than expected.
Hopeful of market support from Q3 earnings season
We think we could see a repeat this quarter that would support the markets. A small number of companies have already reported results and they have beaten estimates comfortably. All this news has been drowned out by Trump getting COVID-19. Financials dominate results this week and we think they’ll do better than anticipated with lower loan loss provisions. This in turn reflects the better than expected performances of both the US and the global economies, as well as a weaker dollar. If we are correct, this will be a solid support for equities, and risk assets in general.
As for the virus, new cases are soaring in the UK as well as Europe, and the US seems on the verge of an alarming third wave. But there is some positive news; AstraZeneca have released details – not of their eagerly awaited vaccine – but of Phase III trials for a treatment for COVID-19 that they are very excited about. If you want to read more, google AZD7442, but one way or another there is mounting evidence that medical science will beat this virus.
Political stalemate in the US…
Meanwhile, we could do with more help from policymakers. It’s stalemate in the US on fiscal policy and we would normally look to the US Federal Reserve to step in. But they prefer to stay out of the limelight over the election period. Their next meeting is, by design, two days after the election, when their hands will no longer be tied. They’ll also have a hint of the employment figures due out the following day. If they’re bad or if there are other signs of economic weakness they might act. If things are stable, they’ll wait to see what sort of fiscal package the Congress comes up with. If the Democrats gain full control, then the fiscal package could be massive.
…political revolt in the UK
The UK government has none of these political constraints on economic policy, but they do appear to be all at sea over the latest lockdown restrictions. Talk of a revolt in northern England, as well as on the Tory backbenches, has left the government rattled. With very disappointing GDP data last week, the Bank of England will surely soon step up the quantitative easing, helping the gilt market to rally. And I expect Rishi Sunak to open the Treasury’s coffers again.
So there’s another exciting week for the markets in prospect. I’m still optimistic, and still positive on risk assets.