The past week saw major movements in the markets, as the 10-year Treasury yield jumped 25 basis points. This had a significant impact on stocks, as the SP 500 fell 8.5% – 9%. This is likely because when interest rates rise, it becomes more expensive for companies to borrow money, which can hurt stock prices. Additionally, the forward 4-quarter estimate for earnings was down from last week and July 1. This suggests that there may be some turbulence in the markets shortly. However, the SP 500 earnings yield jumped to 6.25%, so there may be opportunities for investors to find good deals in the coming weeks.
Although the recession has not directly impacted earnings estimates yet, it is only a matter of time before it does. And when those guide-downs start happening, they will happen quickly and affect many businesses all at once. This was evident last week with the data indicating that zero companies saw their EPS revisions increase by more than 50% during the Q2 reports. This is notable because it’s been almost a year since we’ve seen recorded numbers this low
The Hot Zones this Week
Each week there are zones where trading can get wild. I call these the hot zones.
Tuesday
- Consumer Confidence
- New Home Sales
Friday
- Personal income
- PCE prices
- PCE prices Core
Global Spotlight
Italy’s general election. On September 25, Italy will hold a general election that polls indicate will result in significant gains for the center-right and right-wing political camps. A right-wing government might cause financial investors to be worried about whether Italy would abandon the economic adjustments Mario Draghi enacted in exchange for billions of euros in EU cash. The country’s other main center-right party, Berlusconi’s Forza Italia, has long held pro-EU views. While the probable winner of the election, the Brothers of Italy right-wing party, has promised to observe Italy’s pro-Western foreign policy, some coalition members (particularly the far-right League) have in the past displayed support for Russia. As a result, while Italy is expected to continue applying current EU sanctions against Moscow, Rome may fight attempts to broaden them.
Ukraine’s annexation referendums come to an end. The pro-Russian authorities in the Kherson, Zaporizhzhia, Donetsk, and Luhansk regions of Ukraine will conclude their sham referendums on Sept. 27, allowing Russia to take over the territories. After the voting ends, Russia will more than likely annex the territory immediately. They could finish negotiating treaties with regional authorities and get parliamentary approval within a few days. Even if that happens, the West still won’t recognize those annexations and will put sanctions on Russia.
Campaigning begins in Nigeria. On September 28, candidates including Bola Tinubu of the All Progressives Congress, People’s Democratic Party nominee Atiku Abubakar, and Labor Party candidate Peter Obi will officially begin campaigning for Nigeria’s February 2023 presidential election. In the upcoming months, it is highly likely that we will see an increase in defections between parties, smear campaigns, political violence and electoral corruption. Additionally, divisions within the opposition PDP may lead to increased support for the Labor Party in southern regions. This could potentially weaken the opposition versus Tinubu’s ruling APC and give him an early boost.
Protests in Iran. Anti-government protests in Iran are expected to continue as a result of widespread dissatisfaction with the regime’s handling of social issues, such as police brutality and political imprisonment, among other things. The death of Mahsa Amini, a young Iranian woman who was detained by Tehran’s morality police for allegedly dressing inappropriately, on September 16th has sparked outrage throughout the nation and prompted some of the most strenuous efforts by security forces to disperse protestors in years. Because the fundamentalist Iranian government is unlikely to loosen social restrictions like the required hijab law, there will undoubtedly be more protest in the weeks and months ahead.
Stratfor.com
Economic Calendar
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Briefing.com
Last Weeks Numbers
Review Last weeks numbers here.
Earnings
The S&P 500 has continued to report strong earnings in the second quarter, with 77.7% of companies reporting earnings above analyst estimates. This is higher than the long-term average of 66.1% and the prior four quarter average of 80.6%. However, excluding the energy sector, the estimated Y/Y earnings growth is -2.1%. This indicates that while overall earnings are still growing, there are some sectors that are struggling. Five S&P 500 companies are expected to report earnings this week, and investors will be watching these reports closely to see how the overall market is performing.
Aggregate Estimates and Revisions
- 22Q2 Y/Y earnings are expected to be 8.4%. Excluding the energy sector, the Y/Y earnings estimate is -2.1%.
- Of the 498 companies in the S&P 500 that have reported earnings to date for 22Q2, 77.7% have reported earnings above analyst estimates. This compares to a long-term average of 66.1% and prior four quarter average of 80.6%.
- During the week of Sep. 26, five S&P 500 companies are expected to report quarterly earnings.
Source I/B/E/S data from Refinitiv
Macro Market
Sales of houses and growth in house prices are both slowing down across economies in developed markets (DM) as mortgage rates increase and affordability decreases. Since residential investment and housing wealth are important factors, the slowdown in the housing market suggests that there are risks to economic growth. The influence on inflation is more debatable. In Australia, Canada, New Zealand, and Sweden, where housing prices affect consumer price inflation, the impulse will be lower. The US and Europe are uncertain because shelter prices are based on rentals that are increasing as a result of changing demand for owner-occupied homes.
A change in the inflation force from goods prices to services prices have increased focus on the need to slow wage growth and broader price pressures for services by weakening labor markets. Labor markets have tightened in all DM economies since early 2020, except for Japan. A lot of the tension is caused by reduced labor availability. It’s hard to tell how much participation will increase again, especially with additional forces such as an aging population. Because of this, central banks have said they might need to cut back on labor eventually. In America, it’s guessed that the jobs-workers gap would need to close from 5.2 million down to 2 million for yearly wage growth to slow down to 3.5%. That number is stabilized with inflation rates at 2%.
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