The market is focusing this week on the letter ‘E’ – earnings, elections and the economy.
- Nearly 170 S&P 500 companies have earnings out this week, including from mega-cap names Apple, Amazon and Alphabet this Thursday.
- Third-quarter GDP out also on Thursday could add color to how the economy has rebounded from the second-quarter shutdowns.
- And, finally, the event all investors are watching, the U.S. presidential election, is in a week.
Jonathan Golub, chief U.S. equity strategist at Credit Suisse, is laying out what to watch for each market-moving event.
On earnings, Golub said the reports that have come in have blown expectations out of the water.
“If you’re looking at it from an earnings growth perspective, the earnings are down about 18%-20% versus where they were a year ago. However, if you look at it the way that investors look at it, which is how are the results coming in compared to what your expectations were, it’s just fantastic,” Golub told CNBC’s “Trading Nation” on Monday.
He estimated that companies have topped expectations by roughly 17% — this comes on the heels of a second quarter that saw expectations beaten by 23%. Typically, earnings beats come in at around 3% to 4%.
“What’s a bit surprising, though, is the market is just not responding to these beats. So typically, you get a big stock price move if a company tops expectations, and you’re not getting that happening this quarter and you didn’t have it happen last quarter either,” Golub said.
This may be a factor of investors looking ahead to the next quarter and forecasts still looking murky. Caterpillar‘s release Tuesday morning, for example, did not include forward guidance.
On the economy, Golub said third-quarter GDP should look strong at first glance. However, comparisons with the second quarter muddy what the headline number actually represents.
“It’s a bit of an unfair read because [of] the way the GDP is calculated,” he said. “When you calculate GDP, it’s actually measured on this quarter versus the quarter before it. … You are measuring a closed economy versus one that is opened up, and the numbers are going to be huge … but that’s not really what the story is which is how long will it take us to get back to normal in industrial activity and the like?”
Analysts surveyed by FactSet anticipate third-quarter growth of 31%. Second-quarter GDP fell by a record 32.9%.
As for the election, Golub said the focus on the outcome may be less important to markets than what will fail to happen before then – further stimulus. He added that spikes in Covid cases across the country make this an imperative for the economy and the markets.
“If we had a backstop for this, if we had a fiscal agreement to give people more unemployment benefits and to bail out small businesses, we could withstand a little bit of a shutdown here because we may be facing that. But right now, that does not seem to be on the horizon,” said Golub.
Even if the election swings to Democratic challenger Joe Biden and his party, Golub noted it could take some time before any relief finds its way to Main Street.
“There’s a decent chance that we’re not going to get a deal until after the new president is sworn in in January, and even then it’s going to take several weeks before checks get out to people,” he said.
So which way for the S&P 500 into the final stretch of the year?
“We have a 3,200 price target and, you know, it looked like that was way too low as markets were racing ahead, but right now a market that’s down you know 5% or 6% between now and the end of the year doesn’t seem so unlikely, even if we’re reasonably optimistic longer term,” said Golub.
The S&P 500 traded just above 3,400 on Tuesday.
