The week ahead

Corporate earnings are in focus this week, as 20% of S&P 500 companies in the US report results along with some high-profile UK names. Early PMI reports from the US, the UK and Europe are released for October, and the Bank of Canada are expected to lower interest rates by 50 basis points on Wednesday. The backdrop to this week’s data and earnings releases is a further narrowing in Kamala Harris’s projected lead in the US Presidential election and the lead up to the UK Budget at the end of the month.

Earnings spotlight: UK banks

Earnings season is ploughing ahead. This week it is the turn of UK banks to release Q3 earnings. Lloyds Banking Group will release their earnings on Wednesday, Barclays on Thursday and NatWest on Friday. While we don’t expect the same level of growth as we saw in the US, UK banks are expected to report decent results for last quarter. Lloyds, the UK’s third largest bank, is expected to report revenues of £4.61bn, with profits expected to come in at £1.20bn, both up on Q2.  Estimates for Q3 earnings are down a touch YoY, however, it’s worth noting that Q3 2023 earnings were much stronger than expected, which means that annual comparisons will be tough to beat in Q3 2024. Net interest income margin (NIIM) is expected to remain flat in Q3, between 2.93-2.95%. The cost base is also worth watching to see if slowing inflation is having a positive impact on Lloyds costs. Efficiency is key for UK banks right now, as they try to reduce their cost- to – income ratios. A focus on keeping costs as low as possible may help the company to sustain their return on tangible equity above their goal of 13%. We expect loan loss provisions to be stable, and the bank may also say that the loan loss rate has remained low over the quarter. Overall, this could be a steady quarter for Lloyds, even though the macroeconomic backdrop in the UK deteriorated over the quarter.

Barclays is expected to post strong earnings in Q3, as a return to deal making activity is expected to spur a near 50% increase in investment banking fees. Barclays is expected to report revenues of £6.4bn and net income is expected to come in at £1.26bn. Net interest income is expected to rise for last quarter. However, the focus is likely to be on the outlook for NII forecasts for 2025, now that there are more than 5 interest rate cuts priced in between November 2024 and September 2025. The company has updated the market multiple times on its strategic plans, and we expect that the executive team will confirm that the programme remains on track. A boost to investment banking revenue, and a stronger than expected earnings report on Thursday could make Barclays an attractive option for investors. It currently has a 12-month forward P/E ratio of 7 x future earnings, which makes Barclays look like a bargain.  

US earnings season update

It's been a mixed start for US earnings season. The number of companies beating earnings estimates is higher than average, 79% of companies that have already reported earnings, delivered EPS results above estimates. However, the magnitude of the beat is lower than expected. The financial sector is leading the way in the US, with strong earnings from JP Morgan, Goldman Sachs and Morgan Staney to name a few. 90% of earnings reports from the financial sector have been above estimates. Netflix also had a strong quarter, and its stock price surged more than 11% on Friday after reporting stronger than expected earnings on Thursday night. The market was cheered by the increase in its advertising revenues and its plans to increase subscription costs. However, it will be interesting to see if the market will continue to buy up Netflix stock with abandon, as the impact of its crackdown on password sharing starts to fade in 2025, there is also a limit to how high it can push its subscription costs. This may be a concern for another day, as the positive tone to US earnings season pushed the S&P 500 to another record high at the end of last week.

The rising tide of US stocks is helping to lift the entire market. The FTSE 100 was one of the best performing stock indices in Europe last week, rising 1.27%.

There are plenty of people talking about how over valued the US market is, however, it is the gift that keeps on giving for US stock market bulls. The S&P 500 was higher by 0.85% and the Nasdaq was up by 0.8%. The market does not appear worried about the continuous march higher, and the trend seems steady. Earnings season has seen some big outperformers, and the Vix index, Wall Street’s fear gauge, fell back last week. Thus, unless we see a surprise, the market may stick to the path of least resistance and continue to move higher in short term.

US election update

We would still point out that the market is underpricing the risk of a contested US Presidential election result. The polls have narrowed significantly this week, and the outcome remains a coin toss. RealClearPolitics poll average has Harris on 49.2%, while Trump is expected to win 48.3% of the vote. This is one of the tightest Presidential election races in recent years, and the result could come down to just a few thousand votes. However, the markets do not seem concerned. US bond yields have risen in recent weeks but have stabilized in the last few days. The 10-year Treasury yield is trading at 4.08%, which is the high from August. A 10-year yield at just over 4% and record highs for the main US stock market, just over 2 weeks out from a Presidential election does not suggest there is panic about the result, although the result is highly uncertain. Are US financial markets not worried about who will become president? Do they not fear Trumps tariffs or foreign policies? Or are financial markets unwilling to price in a result at this stage because the race is so tight, which leaves the door open for volatility to flare up next month.

Tesla earnings: Can they pick up from Q2?

Tesla earnings, released on Thursday, are the tech focus of the week. The company is expected to report revenues of $25.41bn, and profits of $2.06bn. Tesla is a volatile stock at the best of times, but it is especially volatile during earnings season. The 12-month forward P/E ratio is already a whopping 79.88 x forward earnings, so we enter earnings season with Tesla already looking expensive.  The stock price is also higher by 48% in the past 6-months, although it has sold off by more than 4% in the last 4 weeks.

A Tesla earnings report is always more than the figures. Elon Musk is selling a story, and the market will be looking to see if he can deliver in Q3. We expect more detail on the cybercab, that was unveiled earlier this month, along with its latest robots. The initial launch did not go down well with investors, which has led to some speculation that new features for the cybercab will be included in this earnings call, including a steering wheel and actual brakes. Investors will also be looking for an update on the launch of the latest $30,000 model. Car sales gross margins could pick up sharply, as Tesla manages to wrestle back pricing power after a slump in EV demand earlier this year. Energy storage is also a big money maker for Tesla, and there could be decent earnings growth in this segment.  

Overall, if Musk can turn around the Tesla story and post better earnings in Q3 compared to Q2, then it may spur a mini recovery in the stock price.

Economic data watch

The preliminary October PMI reports will be the data highlight this week. The market is expecting a slight improvement in the manufacturing survey and the service sector survey to remain elevated. Expectations are for the UK’s October PMI readings to remain stable compared to September. The UK’s PMI data has remained in positive territory, even though the chance of a negative reading for Q3 GDP is growing. Europe’s PMI reports are also expected to remain similar to September, with the composite rate ticking up a notch to 49.7 from 49.6. Germany’s manufacturing PMI is expected to remain mired in contraction territory and to remain just above 40. It is worth remembering that last month’s European PMI reports for September, were so bad that they led to a recalibration of ECB rate cut expectations, which culminated in last week’s ECB meeting, where the ECB cut rates and hinted that another rate cut could come in December. The market has fully priced in a rate cut from the ECB in December, so if this week’s readings are mostly in line, then we may not get too much movement in interest rate expectations.

The euro has had a bad month and has sold off sharply as the US dollar has made strong gains. Recovery attempts have been feeble so far, the single currency initially opened the week higher, but is now trading around $1.0850. However, an upside surprise in the European PMI readings may boost the euro and open the way back to life above $1.09.

Elsewhere, US initial jobless claims, durable goods orders and university of Michigan confidence for October is worth watching. The US stock market continues to trade at record highs and the economy is strong, thus, it will be worth watching to see if US consumer confidence picks up.

Chinese banks lowered their 1-year and 5-year fixed loan rates this week, by more than expected. These cuts had been well flagged. The market is still waiting for a fiscal stimulus package, so these cuts may not be a market-moving event. Chinese stock markets have been extremely volatile in recent weeks. The CSI 300 swerved a loss last week, by rising by just under 1%, however, the Hang Seng fell by more than 2%.

In Japan, Tokyo CPI for October is released. Economists are expecting a moderation in headline and core inflation rates, which may erode support for a December rate hike. Elsewhere, in the UK, there are a raft of central bank speakers, including Governor Bailey. The market is fully pricing in a rate cut from the BOE next month, so it is hard to see him trying to talk down the possibility that rates will be cut further. However, his assessment of the economy will be worth watching, incase the market is under -pricing the chance of rate cuts from the BOE. UK house price data rose at a slower pace than expected in October, according to Rightmove. House prices rose by 0.3%, down from the 0.8% monthly rate recorded in September.