U.S. equities managed to eke out small gains overall in last week’s choppy trading as investors digested the initial round of corporate earnings results and monitored progress towards a consensus on the next stimulus bill that continues to be out of reach. For the week, the Nasdaq Composite led the way with a 0.8% gain, while the S&P 500 and Dow Jones edged higher by 0.2% and 0.1%, respectively. All three indices started the week on a strong note in anticipation that the swift and sustained economic recovery from April’s lows may bode well for the third quarter corporate earnings season. However, equity markets tailed off over the second half of the week and lost most of their gains as the bar is set high for earnings results and uncertainty around the upcoming U.S. elections and a recent uptick in Covid-19 cases globally encouraged a cautious tone from market participants.

 

Corporate earnings season is ramping into high gear following last week’s kick-off centered on large financial institutions who mostly exceeded expectations as revenue from trading and investment banking divisions offset falling interest income and elevated loan loss provisions. Although the initial round of earnings reports surpassed expectations, the bar may be set a little higher than consensus analyst forecasts would indicate. According to FactSet, of the 50 constituents from the S&P 500 who have reported earnings so far, 84% have beat earnings expectations but only 46% have seen a positive stock price impact.

 

The resilience of the U.S. consumer, despite a challenging job market, has been a key driver in the U.S. economy’s impressive bounce back since April. Last week’s retail sales report for September confirmed a continuation in the rebound in spending as retail sales rose for the fifth month in a row with a 1.9% increase over August, exceeding the consensus economist forecast for a 0.7% increase. Retail sales overall have actually surpassed pre-pandemic levels with September’s sales up 5.4% compared to September of 2019. However, the composition of that consumption is very different from pre-pandemic levels as spending at gas stations, clothing & accessories, and restaurants (which each remain down double digits compared to a year ago) have flipped into other areas of the economy, like e-commerce and home improvement stores, which were up 24% and 19% in September versus one year ago.

 

While the positive consumer data trends are encouraging, the level of uncertainty remains high for the months ahead. U.S. consumers and corporations set aside large amounts of cash from stimulus and borrowing earlier this year that has supported spending as relief benefits have begun to fade. But it is uncertain how long consumption growth can be maintained as the level of weekly layoffs remains elevated (898k new unemployment claims reported last week) and many service industries are still struggling with pandemic disruptions and waning fiscal aid.

 

In the week ahead, stimulus negotiations will likely continue to dominate headlines as House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin have narrowed their differences, but market participants see a near-term deal ahead of the election as unlikely. Investors will also sift through the rising flow of corporate earnings reports with 94 companies from the S&P 500 on the docket to report this week. Given the near-term uncertainty and elevated valuations, stock reactions to earnings misses may be more volatile than usual. However, our investment team remains focused on the long-term picture with the understanding that short-term volatility can create the opportunity to invest in high-quality companies at more reasonable valuations.