Main market events 31st Oct – 4th November.

Weekly Trading Plan

The highlights for the coming week:

– EZ Flash CPI and Flash GDP

– RBA Policy Announcement

– FOMC Policy Announcement

– EZ and US Unemployment Data

– Q3 Earnings season underway

Earnings Calendar Highlights

For Q3 2022, 52% of S&P 500 companies have reported actual results. So far, 71% of S&P 500 companies have reported a positive EPS surprise and 68% of S&P 500 companies have reported a positive revenue surprise. If 2.2% is confirmed to be the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q3 2020 (-5.7%). Ex-Energy, S&P 500 is reporting a decline in earnings for the 2nd straight quarter. Bear in mind that the energy sector is reporting the highest earnings growth at 134%.

Source: Factset

What has been, so far, the market impact of positive/negative earnings surprises?

To date, the market is rewarding positive earnings surprises more than average and punishing negative earnings surprises less than average. This has changed compared to last week. Companies that have reported positive earnings surprises for Q3 2022 have seen an average price increase of +2.3% two days before the earnings release through two days after the earnings release. This percentage increase is above the 5- year average price increase. Companies that have reported negative earnings surprises for Q3 2022, instead, have seen an average price decline of -2.0% two days before the earnings release through two days after the earnings. This percentage decrease is slightly smaller than the 5-year average price decrease of -2.2% during this same window for companies reporting negative earnings surprises.

The chart below plots the average price change (from 2-day before to 2-day after the report) for different buckets of % earnings surprises. Now that most of the Big Techs have reported, we have a clear picture:

Source: Factset

The second chart, instead, plots the average price change around the report date differentiating between companies reporting positive EPS surprises and those firms reporting negative earning surprises. The data for the current quarter is plotted against the average price change % of the last 5 years.

Source: Factset

The playbook has changed now compared to last week, especially after the Big Techs reported their earnings. The picture starts to be consistent with markets already being positioned for disappointing numbers, in line with our market sentiment indicators. This is supportive of the price action in the short term.

The highlights for the coming week below:

Source: Earnings Whispers

The market is often fixated on earnings, but according to some studies, earnings explain “just” 31% of the total S&P 500 returns since 2011. See the chart below

Take a look at buybacks. They seem to account for 40% of the realized gains. Buybacks will be back on the table and according to sell-side research, they are going to be in the order of $5bn a day from now till the end of the year.

Some tailwinds. Finally.

FOMC

Since Nick Timiraos, also known as NikiLeaks, tweeted last Friday that the Fed was going to slow its pace of hiking, we had a massive bounce in risky assets and more broadly a significant easing in financial conditions. Below is the chart of the weekly change in the GS Financial Condition Index.

According to Goldman Sachs, in a series of tweets Timiraos has been trying to dial back ahead of Wednesday’s FED meeting. However once again this morning NikiLeaks came again with an article in the Wall Street Journal, showing how much money the Federal Reserve is currently losing. He argues that these losses have been fueled by aggressive monetary tightening. See the chart below:

That’s dovish again!

My impression is that the FED is now testing the market, trying to strike a good balance between avoiding further deterioration in market sentiment and creating too much easing in financial conditions.

Unemployment Data

The other BIG piece of information this week is the Non-Farm Payroll, together with unemployment data. I don’t wanna fool you. I have to discover still the magic formula to guess the next NFP. But if I have to take an uneducated bet, I would guess that the number may slightly disappoint. Reasons?

First. Google Trends never lies…maybe

Nothing dramatic, but the number of searches on the “unemployment” topic is starting to tick up.

Second. Real Estate never lies…

Every city in the Case-Shiller 20-city index saw a decline in home prices in August. The last time all 20 cities were down in a single month was in March 2011. San Francisco is showing the largest decline thus far, -8.2% from its peak in May.

Source: Charles Bilello

Let’s not forget that the U.S construction-only business employs approximately 7.5mio people.

Third. The Democrats.

I am not a conspiracy theorist, but senator John Hickenlooper recently urged J. Powell to pause rate hikes. Did he already see the next NFP? Together with what leaked from Timiraos does not make evidence but it gives rise to the suspicion that this time the number may disappoint.

Market Conclusions

The market is currently fixated on the possibility of a FED’s pivot. At least short term, this will be a key driver. My impression is that the FED will try hard to strike a fine balance between being too hawkish and being too dovish. This is the perfect set-up for lateral markets.

We will be probably stuck in an uncomfortable trading range. Market squeezes will be an opportunity to sell and market dips an opportunity to buy. As always, easier said than done.

But I leave that to you guys!

Have Fun!

Disclaimer

All views expressed on this site are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated. I assume no responsibility for any errors or omissions in the content of this site and there is no guarantee for completeness or accuracy. The content is food for thought and it is not meant to be a solicitation to trade or invest. Readers should perform their investment analysis and research and/or seek the advice of a licensed professional with direct knowledge of the reader’s specific risk profile characteristics.