20/22 Beat

Macro Perspectives: Tue 13 Oct 2020

Stocks opened the week up big.

Last week, it was many of the relative underperformers of recent years that were the winners on the week: small caps, infrastructure stocks, utilities.

Yesterday it was a return of the seemingly indiscriminate flood of money into big tech - Google was up 3.6%, Amazon was up 4.8%, Facebook up over 4%, Apple was up 6% & Twitter was up 5%.

Is it stimulus? Despite a lot of jawboning over the weekend, a deal on stimulus doesn't seem any more likely.

Is it China? Maybe. The Chinese central bank removed a reserve requirement for financial institutions on foreign currency liabilities over the weekend. This tends to be a move to weaken the yuan - tends to move money out of China. Money from China used to flow into our Treasury market, now there seems to be very healthy flows into a new store of value: U.S. big tech monopolies.

Is it earnings? Probably. Third quarter earnings kick into gear this week. We'll hear from Citi and JP Morgan today.

As we know, Wall Street and corporate America will always take the opportunity to dial down expectations when possible. They've been given the mother of excuses through the first two quarters of the year and have taken advantage, setting the bar very, very low (if they have even provided guidance). In the earnings game, expectations are set to be beaten.

With an economy that has bounced back on the order of 35% annualized growth for Q3, we may see some broad and big earnings beats in the coming weeks.

As of Friday afternoon, twenty-two S&P 500 companies had already reported, and twenty have beaten estimates. That's a 91% beat on earnings thus far, with the average earnings beat at 25% above estimates.

So, with a market looking for a 17% year-over-year earnings decline for S&P 500 companies in the third quarter, it appears to be set up for some positive surprises. Stocks seem to be anticipating this, as we are sniffing toward the record highs in the S&P 500.