US Investors Focused on Earnings, Trade Deal Progress

The major U.S. equity indexes finished mixed last week as better-than-expected earnings and optimism around Brexit were offset by a mixed assessment of U.S.-China trade relations. The key stories driving the price action were third-quarter U.S. earnings, a Brexit deal between the United Kingdom and the European Union, although uncertainty remains as the deal will need to be approved by Parliament. Also helping to drive investor sentiment higher were improving U.S.-China trade relations.

The negatives were weaker U.S. retail sales and a bearish outlook by the International Monetary Fund (IMF). Since the consumer has been supporting the U.S. economy, the disappointing retails sales report may have raised some flags at the U.S. Federal Reserve. It certainly caught the eye of investors who drove the chances of a 25-basis point rate cut at the end of October to 93.5%. The IMF once again lowered its projections for global growth this year from 3.5% to 3.0%.

In the cash market last week, the benchmark S&P 500 Index settled at 2986.20, up 0.50%. The blue chip Dow Jones Industrial Average finished at 26770.20, down 0.20% and the technology-driven NASDAQ Composite Index closed at 8089.54, up 0.40%.

Great Start to Earnings Season

According to analysts at Edward Jones, “Last week kicked off the start of the third-quarter earnings season, with tech giant Netflix, pharmaceutical stalwart Johnson & Johnson, and big banks like JP Morgan Chase, Bank of America and Morgan Stanley also beating expectations. Estimates are for earnings to accelerate in coming months, with year-over-year growth in trailing 12-month profits improving from the three-year low of 2.5% in the third quarter of 6% in the fourth quarter. We expect further gains in 2020.”

“Though slowing from the double-digit pace of the last two-years, corporate performance appears strong enough to support the bull market, and we expect equities to outperform bonds. We also think stocks are reasonably priced given 1) current valuations and dividend yields that are in line with historical averages, 2) support from central bank stimulus, and 3) our expectations for modest economic growth ahead.”

International Monetary Fund Lowers Growth Projections

Last week the IMF lowered its projections for global growth this year from 3.5% to 3.0%, the lowest level in 10 years. The growth forecast was pulled down by trade barriers, country specific factors, and structural trends like aging demographics and slowing productivity growth.

United States and China Making Progress

Confusion following the announcement of a partial trade deal between the United States and China on October 11, weighed on equity prices early last week, but conditions improved throughout the week.

China said on Thursday that it expected the US to roll back tariffs on its products as part of any final trade agreement, casting another layer of uncertainty on progress announced by President Donald Trump the week before, however, by the end of the week, the tone from the U.S. and China was a little more upbeat.

U.S. President Donald Trump on Friday said he thought a trade deal between the United States and China would be signed by the time the Asia-Pacific Economic Cooperation meetings take place in Chile on November 16-17.

Meanwhile, Chinese Vice Premier Liu He said on Saturday, “The two sides have made substantial progress in many fields, laying an important foundation for the signing of a phased agreement. Stopping the escalation of the trade war benefits China, the U.S. and the whole world. It’s what producers and consumers alike are hoping for.”

Brexit Deal Good – But Needs Parliament Approval

The special parliamentary session in the House of Commons on Saturday offered little detail on when, or even if, Britain will finally exit the European Union. U.K. Prime Minister Boris Johnson was thwarted by a cross-party group of politicians. Johnson will now be forced to ask for an extension, but EU leaders don’t necessarily have to accept it.

Capital Economics called Saturday’s vote “a decent result for the economy and the pound as it makes a no deal Brexit on 31^st October even less likely.” But it added that “it does extend the uncertainty that has been hampering growth for at least a bit longer.”

Analysts at Deutsche Bank said “the outlook for a Brexit resolution remains constructive,” explaining that the makeup of the voting on Saturday actually meant that Johnson could receive enough backing for his deal at a later date.