NEW YORK: Investors will look to major banks’ quarterly earnings reports in the coming week to help gauge the U.S. economy’s health as the federal government shutdown has interrupted the flow of new data. Major U.S. 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 on Sunday.
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 U.S. 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 over 11% year-to-date and within roughly 3% of its all-time high.
“The market just keeps grinding higher,” said Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions. “The key underpinning of that is stronger earnings outlooks. … When you look at the fundamentals, things continue to look good.” The record-breaking run for U.S. 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 CEO 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 labor market data has raised concerns about growth and prompted the Federal Reserve to restart interest rate cuts.
“Banks are a window into the U.S. economy,” said Irene Tunkel, chief U.S. 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 8.8% in the third quarter from a year earlier, according to LSEG IBES.
“A lot of the bullishness is built around the expected earnings growth,” said Chuck Carlson, chief executive officer at Horizon Investment Services. “If we start to see cracks in that, that would not be good for the market in general.” Attention also will be on Washington to see if Republican and Democratic lawmakers 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 U.S. 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. The monthly consumer price index report, which is closely watched for inflation trends, will be published on October 24, the U.S. Bureau of Labor Statistics said on Friday, after the CPI report was originally scheduled for this coming Wednesday.
While the CPI report will allow the Social Security Administration to meet deadlines necessary for payment of benefits, the BLS said no other releases will be rescheduled or produced until regular government services resume.
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 U.S. economist at Oxford Economics, said in a note on Friday.
“With much of the regular economic data unavailable during the shutdown,” Pearce wrote, “the data fog is thickening.” (Reporting by Lewis Krauskopf; Editing by Alden Bentley, Richard Chang and Aurora Ellis)
