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Capital 19 Catch-Up

Big Bank Profits Save The Day As Earnings Season Gets Into Full Swing

At the start of the week, it was looking like it was going to be a tough one for investors as oil prices continued to rise and both Goldman Sachs and the IMF cut growth forecasts for the US and the rest of the world. However, the start of earnings season rode to the rescue with some stellar performances from the big banks, and others, seeing markets rally hard on Thursday and Friday. Bitcoin prices were also rising which added to the risk-off sentiment, while treasury yields eased off meaning the tech sector was also having a great time of it.

The Nasdaq was the leading major of the week as the likes of Amazon (AMZN) and Tesla (TSLA) drove the average 2.2% higher. The S&P500 came in second with a 1.8% gain as the big banks crushed earnings, while the Dow Jones rose 1.6% and was also lifted by the financials along with some help from the health sector.

On Monday Goldman Sachs cut its US economic growth forecast for 2022 from 4.4% to 4%, and the 2021 number down to 5.6% from 5.7%. Their economists are concerned over the slower than expected economic reopenings out of Covid and the potential lack of fiscal support from the Fed. Then on Tuesday the IMF also raised concerns over global supply chain issues and the spread of the Delta variant and dropped their global GDP estimate for 2021 down to 5.9% from 6%.

The IMF is particularly concerned about the divide between rich and poor nations and the lower levels of vaccination rates in the developing world. While we here in Australia, along with the rest of the first world, are bordering on 60% vax rates or higher, approximately 96% of the population of low-income countries are unvaccinated. It’s something that could begin to impact on growth if poorer countries remain hampered by lockdowns and if new variants arise out of these countries thereby impacting everyone. It certainly benefits everyone to work hard on getting the whole globe vaccinated as quickly as possible.

By mid-week markets were looking shaky with the Dow experiencing four losing sessions in a row. The Federal Reserve meeting minutes showed that they mostly expect to start tapering in mid-November, while inflation figures continued to rise more than expected. CPI rose by 0.4% for the month and 5.4% year on year, where analysts were expecting a rise of 0.3% and 5.3% respectively. Core CPI (excluding energy and food) was slightly lower, however, coming in at 0.2% with 0.3% expected and 4% year on year in line with predictions.

The first earnings of the week didn’t help to stem the losses despite both beating estimates. JP Morgan (JPM) easily topped estimates on the top and bottom line, experiencing smaller losses than expected from their loans section and releasing $2.1 billion in reserves. However, the bank lost 2.6% for the session as management suggested trading income would be 10% lower in the current quarter. Delta Airlines (DAL) also beat estimates on revenue and produced its first profit in the pandemic era (without Federal aid). However, guidance suggested that higher fuel costs will have a detrimental impact in its 4th quarter and the share price dropped 5.8%.

Thursday saw a major turnaround in fortunes as earnings results finally brought some optimism. Walgreens Boots Alliance (WBA) led the Dow and the S&P500, rising 7.4% as it smashed earnings and announced a $5.2 billion investment in primary care company Village MD. The drugstore chain received a financial boost from Covid-19 shots and tests and saw a rebound in demand for over the counter medication. Fellow health sector constituent and Dow and S&P500 member UnitedHealth (UNH) also boosted both indices by gaining 4.2% after it also topped estimates.

The big banks also impressed shareholders with Bank of America (BAC), Morgan Stanley (MS), Citigroup (C) and Wells Fargo (WFC) all beating estimates. Only Wells Fargo failed to convert the success into a share price rise, falling 1.6%, with the others rising 4.5%, 2.5%, and 0.8% respectively. The next day Goldman Sachs (GS) rounded out a great week for the financials by also beating estimates and gaining 3.8%.

So far 41 of the S&P500 companies have reported earnings with 80% beating estimates. Third-quarter earnings growth is now on track to hit 30%, up from the 26% previously estimated. Analysts were quick to point out, however, that those companies who have already reported are ones not likely to be impacted by supply chain issues or costs stemming from a rising oil price. Guidance from the retailers and consumer brands might give a fairer indication of how companies have been affected in the third quarter.

The economic data coming out later in the week also boosted markets. The weekly jobless claims dropped to 293,000 last week, the first time they have fallen below 300,000 in the pandemic era. While retail sales, which were expected to fall slightly in September, actually rose by 0.7%. So far it seems that inflation isn’t proving to be an anchor on economic recovery, and if it is only temporary – as the Fed keeps suggesting – we might be in for a nice little kick along in the next six months.

The week ahead is a massive week in earnings with 72 of the S&P500 to announce their numbers. Just some of the big names to report include Johnson & Johnson (JNJ), Procter & Gamble (PG), United Airlines (UAL), Netflix (NFLX), IBM (IBM), Tesla (TSLA), Intel (INTC), Chipotle (CMG), Snap (SNAP), American Express (AXP) and AutoNation (AN). Apple will be holding a hardware event where it will be introducing its new line of Macbook Pros, while the big tech companies will be back in front of congress as the government attempts to limit the size and power of big hitters such as Amazon and Google (GOOGL).

Have a great week.

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