U.S. equities surged to their best weekly gains in three months last week as the White House prepared a $1.8 trillion stimulus bill proposal and market participants looked ahead to the start of the third quarter earnings season, which is expected to mark the beginning of a turnaround for corporate earnings after a significant second quarter drawdown. For the week, the S&P 500 posted a 3.9% gain while the Nasdaq Composite and Dow Jones climbed 4.6% and 3.3%, respectively. The cyclical energy and materials sectors led the way for the week followed closely behind by the tech sector. Meanwhile, bond yields continued to gain ground with the 10-year Treasury rising to 0.78% from 0.7% in the week prior as Joe Biden’s lead over President Trump widened in the polls, reflecting expectations for a large stimulus proposal if Biden were to be elected in November.

 

Last week’s strong market rally has carried into this week’s early trading, despite indications that stimulus negotiations remain at a stalemate as well as some cautious headlines on Covid-19 vaccine developments as Johnson & Johnson paused the clinical trial for its vaccine candidate due to an unexplained illness with a trial participant. Instead, market participants have turned their focus to the third quarter earnings season kicking off this week, and a surge in optimistic call option buying activity has lifted big tech names that are expected to post standout earnings.

 

According to FactSet, third quarter earnings for the S&P 500 index are expected to have rebounded by over 18% compared to the difficult second quarter results and the forecasts have risen throughout the quarter as economic data on the recovery surprised to the upside. However, earnings are still projected to be down around -20% compared to the third quarter a year ago with year-over-year earnings growth not anticipated to turn positive until the first quarter of 2021. Some of the more defensive sectors, including consumer staples, healthcare, and utilities, are expected to show more modest declines or even manage to eke out positive growth, while the tech sector overall is projected to be down just -2.7% compared to a year prior.

 

While the course of the pandemic and developments around the upcoming election may continue to inject uncertainty and volatility into markets, this earnings season will help provide market participants of the fundamental picture of the resilience of corporate earnings through the recovery, though it will likely be very uneven across industries. The potential for surprises is elevated as well with only 69 companies from the S&P 500 providing guidance for the quarter. 

 

Setting the tone this week, all eyes will be on U.S. banks. The Fed has expressed worry about the health of the financial system without fresh stimulus, which will be the main talking point when bank chiefs present their latest results. Additionally, there will also be important earnings reports from large commercial airlines, who will face questions about how deep they might downsize without extra government cash, and healthcare companies, who will provide updates on the progress of Covid-19 treatments. As equity markets once again approach their highs, the bar has been set high for earnings to justify lofty valuations in the face of high uncertainty. Our investment team will be focused not only on the reported earnings results but also on management outlooks for the coming quarters and their long-term visions emerging from this crisis. We will keep you apprised of our thoughts and implications for investment portfolios along the way.