Major domestic equity market indices struggled today after a successful run last week, with investors weighing corporate earnings and potential higher interest rates after a strong October employment report. With more than 88% of the S&P 500 components having reported, roughly 74% have topped earnings estimates, although only 44% have beaten revenue forecasts.
Corporate profits tied to the consumer have fared better than industrial economies as a continued slide in commodity prices and excess capacity abroad has stifled demand for capital goods. Earnings for the market as a whole are now expected to decline by 3.8% for the third quarter. However, if the energy sector is excluded, earnings are expected to increase by 2.7%.
In last week’s big economic news, the U.S. economy added 271,000 jobs in October, well above the 185,000 expected by economists. The unemployment rate fell to 5%, the lowest print since the depths of the financial crisis in 2008. Fed funds futures are now pricing in a 68% chance of a December rate hike, up from 56% before the jobs report and 27% last month at its lowest point.
All this, of course, is something of a mixed blessing for domestic equity markets participants, who certainly welcome prospects for stronger employment and income growth. However, investors also fear the dampening impact of higher interest rates on economic growth and earnings multiples after years of accommodative Fed policies and historically low rates.
Fed presidents Bill Dudley (New York), Charles Evans (Chicago) and Jeffrey Lacker (Richmond) are all scheduled to deliver speeches this week. Market participants hope the three policy makers will address questions concerning the timing of rates hikes and the context of the Fed’s internal debate relating to economic growth and potential inflation threats, whether imminent or a ways off into the future.
Markets will spend the week with one eye on the Fed, and the other on earnings reports as the Q3 earnings season winds to a close. While the interest rate debate feels like old news, we would not be surprised by heightened volatility as Fed liftoff comes into view.