Investors will look to major banks’ quarterly earnings reports in the coming week to help gauge the US economy’s health as the federal government shutdown has interrupted the flow of new data.
Major US equity indexes slumped on Friday, stalling the market’s momentum, after comments from President Donald Trump ratcheted up trade tensions with China.
Stocks ended the week on a dour note just before the benchmark S&P 500 is set to mark the third anniversary of the start of its current bull market run today.
Markets had been overbought and due for some volatility, said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments.
“At the end of the day, it’s going to come back to the economy,” Miskin said. “It’s going to come back to corporate profits, and earnings season is right around the corner.”
With the US stock market’s valuation around its highest level in five years and some concerns about over-inflated investor enthusiasm for technology and artificial intelligence, a strong third-quarter earnings season will be critical for equities to maintain their momentum.
Despite Friday’s sharp decline, the S&P 500 remains up more than 11 per cent year-to-date and within roughly 3pc of its all-time high.
The record-breaking run for US stock indexes has been accompanied by recent strong gains for other assets, including gold, silver and bitcoin.
Several high-profile officials have recently made cautious comments about markets, including Kristalina Georgieva, head of the International Monetary Fund, and JPMorgan chief executive officer Jamie Dimon.
JPMorgan is among the major banks kicking off the earnings season when it reports on Tuesday, along with Goldman Sachs, Wells Fargo and Citigroup. Bank of America and Morgan Stanley are due on Wednesday.
Recent weak labour market data has raised concerns about growth and prompted the Federal Reserve to restart interest rate cuts.
“Banks are a window into the US economy,” said Irene Tunkel, chief US equity strategist at BCA Research. “If we see that consumers are still spending, if we see that demand for loans is improving, then I will start to think that perhaps we’re not really edging towards contraction.”
Other companies due to report next week include healthcare company Johnson & Johnson and asset manager BlackRock.
S&P 500 companies overall are expected to have increased earnings by 8.8pc in the third quarter from a year earlier, according to LSEG IBES.
Attention also will be on Washington to see if Republican and Democratic legislators break an impasse and end a government shutdown that began on October 1.
Markets have largely shrugged off the shutdown so far, but investors have warned that risks to the economy will increase the longer it goes on, while it is already hamstringing US travel.
Another issue for investors is the interrupted publication of key economic reports by government agencies.
The monthly employment report, due on October 3, already has been delayed. Investors have been concerned that the shutdown also could affect next week’s data, including releases related to inflation and retail sales.
If the shutdown drags on through next week, there will be an impact on the October employment report when it is released, “which would make the numbers harder to interpret,” Michael Pearce, deputy chief US economist at Oxford Economics, said in a note.
“With much of the regular economic data unavailable during the shutdown,” Pearce wrote, “the data fog is thickening.”
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