Weekly comment: Wall Street hits new highs as Q3 earnings season begins

Market overview – Richard Carter, Head of Fixed Interest Research

Stock benchmarks resumed their move higher last week, boosted by some upside surprises as third-quarter earnings season got underway. The MSCI All Country World index rose 0.6% (19.3% YTD) as yields also ticked up, with the US 10-year Treasury reaching 4.12% — its highest intraday level in 2 ½ months.

United States:

US equities recorded another weekly gain, helped by JP Morgan and Wells Fargo posting smaller than expected declines in their latest results. This helped lift US bank benchmarks to their highest levels since the Silicon Valley Bank collapse in early 2023. Tech stocks, boosted by a resurgent Nvidia which has moved back near its all-time high, delivered a 1.1% weekly return (22.9% YTD) in line with broader benchmarks (23.2% YTD).

The latest US inflation data came in higher than expected as the headline and core (less food and energy) consumer price indices came in at 0.2% and 0.3% respectively for September — both 10 basis points above forecast. On an annual basis the 3.3% print in core prices was the first time this metric has ticked up in almost 18 months. There was also negative news on the employment front, as weekly jobless claims surged to a 14-month high of 258k. However, this rise could partly be explained away as due to disruptions from Hurricane Helene. Overall, the market took the news in its stride with stocks continuing to move higher as the inflation data saw bond yields increase.

United Kingdom:

A rise in manufacturing and construction output lifted UK GDP by 0.2% in August, as the economy returned to growth following two months of stagnation. UK stocks posted mild losses on the week, with blue chips returning -0.3% (10.1% YTD) and mid-caps -0.6% (8.3% YTD).

The 10-year gilt yield increased 8 basis points to 4.21% (+68 basis points YTD) while the pound was little changed against the US dollar at 1.31.

Europe (excl. UK): 

The MSCI Europe ex UK ended the week up 1.0% (10.8% YTD), helped by growing expectations of European Central Bank (ECB) rate cuts and a more positive sentiment surrounding China following recent stimulus measures. Economic activity in Germany continues to disappoint with the eurozone’s largest economy set to contract this year, according to Robert Habeck, economy minister.

The spread between UK and German benchmark 10-year has increased as a result of a growing economic data divergence, rising to 1.93% — the highest level in over a year. There is some speculation that this widening is due to concerns around UK chancellor Rachel Reeves’ upcoming budget, although it appears more likely to be a result of a sputtering German economy which has seen inflation fall back below 2% for the first time since early 2021. 

US banks helped by soft landing

While quarterly earnings fell at both JP Morgan and Wells Fargo — the largest and fourth-largest US banks respectively — the market reacted positively with shares rising by around 5% each on Friday. For JP Morgan Q3 net income fell 2% to US$12.9bn, above the US$12.1bn analysts had forecast. The 5% net income drop at Wells Fargo to US$5.1bn was also better than the expected US$4.5bn.  

The results are further proof that the world’s largest economy has fared relatively well despite high rates. Although inflation recently ticked higher it is widely perceived to be back under control, and it looks like the Federal Reserve has achieved this feat without the economy entering a recession. On 15 October Bank of America, Citigroup and Goldman Sachs will announce their Q3 results, with Morgan Stanley set to report the following day.

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