/ October 21 / Weekly Preview
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Monday:
Fed Speakers
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Tuesday:
N/A
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Wednesday:
Existing Home Sales (3.9M exp.)
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Thursday:
S&P Global Services PMI (55 exp.)
New Home Sales (0.72M exp.)
Initial Jobless Claims (247K exp.)
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Friday:
Durable Goods Orders MoM (-0.9% exp.)
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Monday:
Nucor NUE
Zions Bancorp ZION
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Tuesday:
GE Aerospace GE
Verizon Communications VZ
3M MMM
Freeport-McMoRan FCX
General Motors GM
Genuine Parts GPC
Lockheed Martin LMT
Moody's MCO
Philip Morris International PM
Quest Diagnostics DGX
RTX RTX
Enphase Energy ENPH
Range Resources RRC
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Wednesday:
Tesla TSLA
Align Technology ALGN
International Business Machines IBM
Lam Research LRCX
O'Reilly Automotive ORLY
ServiceNow NOW
AT&T T
Boeing BA
Coca-Cola KO
General Dynamics GD
Lennox International LII
NextEra Energy NEE
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Thursday:
American Airlines AAL
Harley-Davidson HOG
NASDAQ NDAQ
S&P Global SPGI
Southwest Air LUV
Valero Energy VLO
AppFolio APPF
Edwards Lifesciences EW
Western Digital WDC
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Friday:
Colgate-Palmolive CL
Navigating the Heart of Q3 Earnings Season
Over the past few weeks, we’ve discussed how markets are trading in an apparently unbreakable bullish pattern on virtually all timeframes, ranging from the very short term, to the longer term. Underpinning bullish assumptions are a couple of notable factors including:
Optimistic EPS Growth Assumptions for 2025;
The Fed moving to an accommodative interest rate policy, despite no real economic “emergency”;
An undisputed win by Donald Trump in the upcoming elections;
Technical price strength in major equity market indices + seasonality and buybacks;
Bull markets (same as bear markets) have a tendency to be self-reinforcing, as high prices beget higher prices. Investors always find a reason to justify their own inclinations and biases, regardless of the price action. Today, analysts project a double-digit return for the S&P 500 by year-end, reflecting growing optimism among market participants. This month, there was a significant increase in equity allocation, the largest since June 2020. Currently, 31% of investors surveyed by BofA are overweight equities, a notable rise from 11% the previous month.
Short term technical price action is primarily a supply and demand equation. Given the rise in stocks allocations, it comes as no surprise to see an equity ETF like SPY becoming overbought, but also well bid-up and supported.
For our analysis we make the assumption of a $672 Price Target, with a 21% CAGR slope for the trading channel — which is indeed optimistic. Upside stands at around $605 (R1), is achievable by year-end and yields a potential +3.59% appreciation from last week’s close. To the downside, SPY is well supported in the $562 - $569 area, where the 50-DMA and the M-Trend retracement level converge (-3.76% potential loss). Short-term technicals suggest that risk and reward are equally balanced at the moment.
Given that many individual stocks are becoming overbought as well, bullish sentiment is indeed strong. This has led to significant and continuing inflows into the market, which will support asset prices — but also create the conditions necessary for a pullback or consolidation. However, we view the potential for a correction as limited (2%-3%), since a major factor will come into play at the end of the month: corporate buybacks, amounting to roughly $6 billion per day into year-end.
Furthermore, many professional managers have been lagging the market this year and will have to play “catch up”, leading to increased demand for equities — even if just for reporting purposes at year end.
Part of the latest push higher has been fueled by election bets. Risk assets like Bitcoin (a driver of speculative investor sentiment) have rallied in correlation with Donald Trump’s chances of securing a victory in the upcoming elections. Over the past month, Bitcoin has rallied +8.3% in response to the most recent polling and betting market data, presumably benefitting from his crypto-friendly policies.
In addition to the crypto market, we believe a Trump presidency is viewed as being more secure for Taiwan. With Trump as president, it would be less likely for China to stage a military invasion. Less geopolitical risk on this front has the potential to boost some heavily weighted technology and semiconductor manufacturing names, primarily Nvidia (NVDA) and Apple Inc. (AAPL) — which in turn would boost the main indices and risk sentiment in general.
It is our opinion, that given the current set-up, a Kamala Harris victory would cause a slight slump in stock markets. Certainly an occasion to buy-the-dip, but a short term risk nevertheless. Another election related risk is a muddy result, allegations of voter fraud and basically a situation where both parties will claim victory. Some analysts warn that most swing states' vote counting and certification procedures could again extend beyond Election Day.
If short term technicals and election bets are rather speculative indicators, we must rely on corporate results and the Fed’s interest rate policy to navigate the markets further. On that note, Q3 Earnings Season is starting with a low bar:
Consensus Earnings Growth: Analysts estimate that S&P 500 earnings will increase by around 3-4% year-over-year in Q3; this represents a significant decline from earlier expectations of 7-8% growth;
Revenue Growth Projections: Revenue growth is expected to remain subdued, with consensus estimates forecasting a 2-3% increase, down from earlier projections of 5%;
Note the lack of earnings growth outside of the top 10 largest companies in the S&P 500 index. According to Bank of America, while overall Q3 earnings growth was expected to be a modest 3-4%, this would be entirely due to a 19% increase in the “Magnificent 7” earnings. The rest 493 companies are expected to post flat earnings.
However, the broad market (top 1000 stocks) has caught up to the momentum of SPY, as shown in our Z-Score divergence analysis below. This doesn’t make sense at all when viewed strictly through the lens of Q3 Earnings Season, if BofA’s analysis is correct. Why would “the rest of the market” — ETFs like IWM, RSP and MDY — outperform SPY on a relative momentum basis (which is what relative Z-Score is), if their constituents are unable to grow earnings?
Well.. simply put, the answer to that question almost entirely lies in 2025. The market is “looking past” weak Q3 earnings, and focuses on what lies ahead, to a great extent. Another great table from BofA and FactSet put the Earnings Growth story into perspective.
Aside from Magnificent 7 companies, Q3 2024 is expected to be a “dud”, followed by markedly better results in Q4 2024 and Full-Year 2025.
By “better” we mean at least TRIPLE the earnings growth to be exact.
To be sure, triple the earnings growth is a high bar to pass. Add to this the pattern of analysts overestimating corporate earnings and we’re facing a potential set-up for disappointment. This brilliant graph by Yardeni Research illustrates how analysts earnings estimates always start as overly optimistic, and degrade as reality sets in, eventually converging only as reporting is imminent.
What about the latest Q3 revisions? As entirely expected, analysts have cut their forecasts, but the cut was the largest since 2022 — per Citigroup US Earnings Revision Index.
This comes despite the Fed’s projected easing of monetary policy.
Primarily, analysis are worried by unsustainably high gross margins, as Albert Edwards notes:
“When we say US profit margins are absurdly high, the chart below rams home the point. These are whole economy BEA data and so include unquoted companies, and the BEA ‘scrubs’ the data clean. Until Greedflation emerged in the aftermath of the pandemic, 15% of GDP was typically top of the pops. The even larger share of GDP comes at the expense of workers.”
In other words, further profitability improvements will likely be much harder. Input costs remain elevated, potentially further squeezing corporate margins. We are already measuring a drop in Gross Margins as companies report earnings, and it’s not pretty — a more than 1% fall so far. We’ll see how the rest of the quarter goes.
Our Trading Strategy
We are undoubtedly trading in favorable and bullish conditions. We need to respect these trends, while also keeping an eye on fundamentals and potential risks. At some point, profit taking will be advised, but for now that is not the case. In our client accounts, we are buying dips, as allowed by each customer’s cash levels and required allocation.
Point is: we are net buyers, and the live trading Sigma Portfolio is already fully allocated. We do expect some volatility along the way, including in reactions to earnings. Notably, Tesla (TSLA) will be reporting on Wednesday, as well as Lam Research (LRCX). Not a lot of market moving economic data will hit the tape, so investors will most likely focus on corporate guidance for day-to-day trading.
Signal Sigma PRO members will be notified by Trade Alert of any live portfolio changes (if subscribed). If you’re not on this plan yet, you can get a free trial when you join our Society Forum. If you need any help with your trading strategy (or would like to implement one on your account), feel free to reach out!