Markets Brace For Earnings, Election, And The Fed

Within the S&P 500, 170 companies reported earnings last week, and 75% of S&P 500 firms reported better-than-expected earnings for the quarter. The pace of the third-quarter earnings season begins slow, but 102 S&P 500 companies are scheduled to report.

The Magnificent 7, consisting of Microsoft (MSFT), Meta Platforms (META), Amazon.com (AMZN), Apple (AAPL), NVIDIA (NVDA), Alphabet (GOOGL), and Tesla (TSLA), featured heavily in last week’s earnings. Alphabet, Meta, Microsoft, Amazon, and Apple reported better-than-expected earnings. Tesla reported much better-than-expected earnings the previous week, and NVIDIA won’t report until late November. Because these companies are a critical driver of earnings growth and a significant percentage of the S&P 500’s market capitalization, the better earnings made a significant positive change to the pace of earnings growth for the quarter.

Berkshire Hathaway (BRK/A, BRK/B) reported robust earnings growth on Saturday. The big story was Warren Buffett’s continued sales of Apple (AAPL); a deeper dive is available here.

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The S&P 500 fell by 1.4% for the week. The Magnificent 7 lost 1.8% due to declines in Tesla, NVIDIA, Microsoft, and Apple.

Among the companies reporting this week are Emerson Electric (EMR), Yum! Brands (YUM), Becton Dickinson (BDX), and Airbnb (ABNB).

The communications services, healthcare, consumer discretionary, and industrials sectors were the most significant contributors to last week's earnings growth improvement.

According to the FactSet data, the earnings growth rate for the technology sector retreated to 6.4%, down from 15.5%, primarily due to a one-time charge at Apple. Apple had a $10.2 billion one-time tax charge related to a reversal of the European General Court’s aid decision. Looking at apples-to-apples profits excluding this charge, Apple’s earnings grew 12.3% year-over-year.

Sales growth is closely tied to nominal GDP growth, which combines after-inflation economic growth (real GDP) with inflation. At this point in the earnings season, sales growth has exceeded expectations, with the tailwind from 4.9% year-over-year nominal GDP growth.

So far, the blended earnings performance has underperformed expectations at the end of the quarter. Combining actual results with consensus estimates for companies yet to report, the blended earnings growth rate for the quarter is at +5.1% year-over-year, above the expectation of +4.4% at the end of the quarter, but an improvement over the previous week’s 3.6%.

While the short-term path of stocks is always unknown and subject to human emotion, the evidence unmistakably shows that investors should not make investment decisions based solely on their political beliefs. A detailed analysis of the history of elections and stock returns is here. The election could add to market volatility, but stocks have been higher two-thirds of the time post-election until the end of the year, with a median rise of 3.7%.

While the October monthly jobs report was weak, with only 12,000 jobs created and a downward revision of the last two months, the storms and strikes negatively impacted the results. Despite the noisy data, the markets are pricing in high confidence that the Federal Reserve will cut rates by 25 basis points (0.25%) at the meeting on Thursday. Another 25 basis points cut is expected in December, so Chair Powell’s remarks will be crucial to fine-tuning those expectations.

Robust earnings growth from most of the Magnificent 7 companies helped lift the overall outcome of the earnings season. This week remains busy on the earnings front with additional possible volatility from the Presential election and the Federal Reserve meeting.