By: Aaron Wall, CFA
Partner, Portfolio Manager
Equity markets have continued to be volatile this week, experiencing their first true pullback since this rally began after Liberation Day in April. Let’s dive into two key storylines to get a sense for where things currently stand as we ask ourselves, “Does the data reflect the recent weakness?”
Q3 Earnings: Overachieving
All eyes were on Nvidia this week for its Q3 earnings report—and the largest company in the world didn’t disappoint. Record revenue bolstered a 65% jump in profit.As the most important public company at the center of the most dominant theme in the market, the importance of Nvidia’s performance cannot be understated.
The broader market is also seeing a strong earnings season. Analysis earlier this week by FactSet showed that, with 92% of S&P 500 companies reporting, 82% reported positive earnings surprises.
FactSet also found that the blended YOY growth rate for the quarter was 13.1%, which will mark the fourth consecutive quarter of double-digit earnings growth for the index if this is the final figure. Thinking back to downward revisions from April at the start of the tariff tantrum, these numbers show major upside surprises.
Another interesting data point is that the net profit margin for Q3 was 13.1%, the highest level since at least 2009 (when FactSet began tracking this metric).
There hasn’t been a significant reward (in the form of single-day price increases) for companies beating their expectations. In fact, FactSet points out that the market has been more likely to punish companies that miss expectations than reward those that beat.
By all accounts, earnings in the S&P 500 outperformed in the third quarter. Given the market momentum we've seen over the last few months, this earnings report serves as solid confirmation that companies are on good footing.
Economic Data: Missing
Companies had a good quarter, but what about the economy? Now that the government has reopened, we are starting to receive some pieces of data that markets have been waiting for.On Thursday morning, the September nonfarm payroll report was released, reflecting 119,000 jobs added, outperforming estimates of 50,000. This was the strongest reading in five months.
The unemployment rate did rise to 4.4%, and the continuing claims also increased. All of this paints a murky picture, but the headline job creation strength does provide a reason to be optimistic.
It’s important to note that we will not be receiving data for October, something we discussed in last week’s edition of Investment Insights. This means there will be no way to identify how this trend has evolved until we get the numbers for November in a few weeks.
The Market: Murky
When Fed Chair Jerome Powell said, “What do you do if you’re driving in the fog? You slow down,” the market seemed to pay attention. As of market close on Thursday, the S&P 500 officially declined by 6% from its recent all-time highs.Fed funds futures, a market instrument that traders use to express their prediction of the Fed’s actions, has been volatile for the December 9-10 meeting. The chart below shows the probability of the Fed either maintaining interest rates or cutting them.
As you can see, the market is having a lot of trouble making up its mind on whether the Fed will maintain a hold-the-line approach or resume interest rate cuts next month.
Source: Investing.com
