The earnings season is upon us, and so far most of the 500 companies that make up the benchmark index are reporting good profits. Due to the reduction in fiscal flows, there had been concerns that the overextended equity markets didn't reflect the underlying macro conditions, and there appeared to be many headwinds from inflation and manufacturing slowdowns. The key is to follow the data and if companies are doing well and the technicals are aligned for a bullish trade, we should follow along rather than fight the trend.
Indices Weekly Analysis
As U.S. equities gained for a sixth consecutive day, the benchmark S&P 500 is within reach of an all-time high.
Currently, more S&P 500 companies are beating EPS estimates in the third quarter than average, and they are beating them by a wider margin than usual. S&P500 earnings are rising at their third-highest rate (year-over-year) since Q3 2010.
According to analysts, earnings will grow by more than 20% for the fourth quarter and by more than 40% for the full year. Growth is above average due to both higher earnings in 2021 and year-over-year growth compared to weaker earnings in 2020 following disruptions caused by COVID-19.
Netflix released its third-quarter earnings report after the market closed yesterday, adding 4.4 million subscribers during the period and above Wall Street analysts’ expectations of 3.84 million additions. The shares are up 20% in the last three months, but the buy the rumor sell the news effect has meant profit-taking and a slight reduction in the share price today.
Technology stocks make up a significant portion of the S&P500 and due to the US 10-year yields, these stocks could be coming under some pressure if the yields continue to rise. Yields climbed again yesterday after Federal Reserve Gov. Christopher Waller said the central bank should begin tapering its monthly purchases of $120 billion in Treasuries and mortgage-related assets starting next month.
Thankfully for the indices, today's price action shows the benchmark yields coming off from a recent high and a close below 1.630% could see a more significant drop.
Companies in the Financial sector which include JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup, Wells Fargo, and Morgan Stanley, reported positive earnings last week which contributed significantly to the overall earnings improvement.
Almost all S&P 500 companies that have reported so far have exceeded their revenue estimates, and analysts expect earnings to grow by more than 20% in Q4 2021 and by more than 40% for 2021. Something to watch out for though is the slowdown in the Chinese economy and Bank of America says its lower projection of gross domestic product will have a 4.4% impact on S&P 500 earnings. Materials and technology stocks in the US, which are more dependent on China's economic growth than on the US economy, are most vulnerable to a slower-growing China. Tesla reports later today and that is one company that has a lot of presence within China and could be a bell-weather for a larger slow-down in the global economy.
Technically clearing the 50-day moving average, is suggesting that underlying trends are getting stronger in the US indices. Last week saw the S&P500 close above the descending trend line that had capped prices, at the same time it closed above the 50-day ema. The key now is to wait for support to be tested to add into any long trades as was the case before traders took profits at the all-time high prices. Dynamic support should be around wherever the 50-period moving averages are, but previous swing highs should also act as market structure support.
This also works on an intraday chart, where we see that the 50-period moving average acted as a great “buy the dip” indicator and the aggressive breakout of the previous swing high indicated a level of near-term support as a line in the sand if nothing else. For traders wishing to use this technique having a higher time frame confirming what you see on the intraday charts is key.