Stocks reacted positively to a successful start to earnings season.

The major banks kicked off third-quarter earnings season last week with impressive results. With about 10% of the S&P 500 having reported, earnings are beating estimates by 14%, with 77% of companies topping projections. Financials are surpassing expectations by 21%, with the rest of the market delivering an aggregate beat of 5%.

Third-quarter expectations are for revenue and earnings growth of 14% and 27%. The deep cyclical Materials (90%) and Industrials (67%) are expected to show leading earnings growth for the third quarter. The defensive Consumer Staples (2) and Utilities (1%) are expected to show the smallest earnings growth.

During the next two weeks, 63% of S&P 500 companies by market capitalization will report results. Although third-quarter earnings growth will decelerate sharply from 88% in the second quarter, there is reason to believe upside exists to the 27% year/year earnings growth expected by consensus. The key reason is the low hurdle. After strong results in the second quarter that witnessed both record breadth and magnitude of positive surprises, analysts only nudged their third-quarter estimates up by 3%.

We also see a healthy labor market supporting economic activity and further profit growth and ultimately stock prices in the coming quarters as discussed below.

Labor Markets Improvement Continues: While the number of job openings fell 5.9% in August, its first decline this year, to 10.4 million, that was still the second highest level on record. Hires fell 6.5% to 6.3 million. The declines in both job openings and hires were led mostly by accommodation and food services and public education, impacted by the Delta variant over the summer and uncertainty around school re-openings.

Despite fewer job openings and hires, the quit rate rose to a record 2.9%. This indicates high worker confidence and bargaining power, which typically comes with a tightening of labor market conditions. Indeed, the number of unemployed per job opening was practically unchanged at 0.8, near its lowest level since data started in 2000, and showing more job openings than people looking to fill them.

Weekly jobless claims are also consistent with an improving labor market. Initial claims for unemployment insurance dropped 36,000 last week to 293,000, below the consensus of 318,000, and below 300,000 for the first time since March 2020. This reflects increased efforts by employers to retain workers amid tightening labor market conditions.

Leading Indicators Continue to Point to a Moderating Economic Expansion: The pace of expansion in economic activity in the OECD area as a whole looks set to continue to moderate after the post-pandemic rebound, according to the latest OECD Composite Leading Indicators (CLIs).

While the U.S. CLI was practically unchanged, the level of the CLI is still consistent with an above-average expansion.

The CLIs continue to anticipate a moderating pace of expansion at above trend level in Canada, the euro area as a whole and the United Kingdom. Similar indications have now emerged in Japan. In France, the CLI expects economic growth to remain below the long-term trend. One factor pulling down the CLIs is the persistent rise in consumer prices in recent months, driven by surging energy prices.

Among major emerging-market economies, the CLI for China, weighed down by the contraction of steel production, is now pointing towards stable growth rather than a steady increase, as reported last month. In India the CLI indicates stable growth. Slowing growth continues to be anticipated in Brazil. The CLI for Russia is still pointing to a steady increase in growth above the long-term trend.

While global growth has peaked, it is at a high level. Progress on vaccinations, along with continued accommodative monetary and fiscal policies, should keep recession risks low for the foreseeable future.


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