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Week Ahead: Earnings Season Begins, China Escalations Continue, and the Jobs Report Has Past

Earnings season is always a big deal for the markets; however, this earnings season will be particularly noteworthy.  As many analysts and economists feel that growth may have peaked over the summer, Q3 earnings will be closely watched for earnings that miss consensus and for companies that release downward revisions to guidance.  It all begins this week with banks!  In addition, China and Biden have agreed to meet virtually be the end of the year, however that seems to be about all the two can agree on.  Watch for more banter between China and the US this week.  Also, although Non-Farm Payrolls missed estimates, the revision to the August print made up for some of that.  Markets will still be digging through the details to try and determine if the Fed is ready to taper at its November 3rd meeting!

Earnings

Earnings this week start off slow. However by the end of the week, most of the major backs on Wall Street will have reported.  The banking sector has already outperformed much of the S&P 500 this year.  It will be important to watch guidance to see if banks expect the out performance to continue.  According to my colleague Fiona Cincotta, here are the most important items to look for in bank earnings reports:

Loan growth

The prospect of the Fed moving to raise interest rates sooner rather than later has been a closely watched by the markets. A hike in rates would be good news for Net Interest Income at the banks. Such a move would widen NII margin, helping to explain why the banks have outpaced the broader market. However, with corporations issuing bonds and consumers making the most of their stimulus money to pay down credit cards, banks have struggled to grow lending.

Capital Market performance

Capital market underwriting, a boom in merger and acquisitions and record-breaking deal making is expected to boost revenue streams in those banks which dominate this area, namely, JP Morgan and Goldman Sachs.

EPS

Across the pandemic banks wrote off huge sums for bad loans reserves. Bad loans never materialized to the extent that was initially forecast thanks to fiscal and monetary support. Last quarter the banks released some of these reserves, inflating earnings. This is could well happen again this quarter.

Of the major banks to report, these are the main ones to watch: BLK, JPM, SCHW, USB, C, BAC, UNH, WBA, WFC, MS, GS

China

US President Joe Biden and Chinese President Xi have agreed to hold a virtual summit by the end of this year.  This comes at a pivotal time as the US has recently accused China of not holding up their end of Phase 1 of the Trade Deal that was agreed upon under the Trump administration.  In addition, the Wall Street Journal reported last week that the US had military in Taiwan for at least a year and is sending additional forces over to train their military.  China has been flying aircraft over Taiwan as a show of force, as it seems they may be trying to provoke Taiwan into a war.  The US, UK, and Australia have also recently entered into an agreement to provide Australia with nuclear submarines, which is not sitting well with