Overview: Global stocks were higher last week, finishing the week with a strong rebound, after a short-term deal to raise the debt ceiling allayed investor concerns and beat the Oct. 18 deadline. In the U.S., the S&P 500 index ended the week 0.8% higher, while international stocks followed suit. The economic focus was on the U.S. nonfarm payrolls report, where new jobs rose by a lower-than-consensus 194,000 for the past month, while the unemployment rate dropped to 4.8% from 5.2%, better than consensus expectations. Meanwhile, initial jobless declined for the first time in four weeks to 326,000. The payrolls report reflects a tight labor market, yet hiring has been limited, suggesting a shortage of skilled labor. The ongoing U.S. labor shortage has slowed the labor market recovery and puts upward pressure on wages. While tight labor supplies will likely persist short-term, shortages will probably ease this fall following the September expiration of supplemental unemployment insurance benefits. Markets will be watching for clues from the Federal Reserve whether the disappointing headline jobs number for September will affect their timeline for the tapering of asset bond purchases. Any delay in the timing of tapering would likely be perceived as a positive for the bond markets. Treasury yields reached their highest levels in more than three months last week, with the 2-Year and 10-Year Treasuries ending the week at 0.32% and 1.60%, respectively. Oil prices soared this past week after the OPEC+ confirmed that it continues to gradually increase output. The benchmark WTI crude oil prices hit multi-year highs before ending the week at $79.35 per barrel. WTI oil futures are up another 2% this Monday morning, and are now up over 67% year-to-date.
Earnings update: This week marks the beginning of key earnings reports for the third quarter. JPMorgan, Blackrock, and Delta report on Wednesday, with Wells Fargo, Bank of America, and Citigroup following on Thursday. An earnings update follows from JP Morgan. With 4.6% of market cap reporting, our current estimate for Q3 2021 S&P 500 operating earnings per share (EPS) is $48.25 ($40.42 ex-financials). This represents EPS growth of 27.3% from a year prior, and 21.2% since 3Q19. However, on a sequential basis, estimates point to an earnings contraction of 7.3% quarter to quarter. The projected slowdown in quarterly growth can be attributed to macro headwinds such as the spread of the COVID-19 Delta variant, supply chain disruptions, slower economic growth and rising wages. That said, the average price of oil increased 73.4% during the quarter and the U.S. dollar declined by 1.4%, both of which should help support earnings. At the sector level, energy, materials and industrials are projected to lead the way, while financial profits look to have declined. Health care is expected to see earnings rise 37.2% y/y, and technology and communication services should also post solid gains. Although current estimates are showing an earnings decline relative to the second quarter, on average analysts tend to underestimate earnings by 5.3% at the start of the quarter. As such, earnings may surprise the upside, supporting equity markets against a backdrop of higher volatility.
Weekly Returns and Data
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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