S&P 500 hits fresh record as focus shifts to earnings

The S&P 500 hit its 46th record high of the year on Monday, defying the recent and uncomfortable combination of stronger-than-expected jobs and higher-than-expected inflation numbers that hint that the Federal Reserve (Fed) should slow down the pace of whatever policy easing plan it had in head a month ago. The index traded at 5871, Nvidia erased all the summer weakness and flirted with ATH levels as well after the company CEO Jensen Huang said that the next generation Blackwell chip – which suffered some delay – is now ‘in full production’ and that the demand for it ‘is insane’. Nvidia is probably not done surprising and thriving. The bad news is that we must wait one more month before finding out its Q3 results, but the good news is that the earnings from TSM will give a first hint on the strength of the upcoming numbers already this week.

And speaking of surprising, the earnings season kicked off well for the big US banks that announced their earnings so far. And beyond banks, around 6% of the S&P500 companies revealed their earnings and nearly 80% reported a positive EPS surprise according to FactSet. And positive vibes could continue as we dive deeper into the earnings season. If nothing, analysts cut their earnings expectations for the Q3 gradually to around 4% growth, whereas this expectation was near 8% in summer. Yet the companies themselves have a guidance for about 16% growth in earnings. The gap hints that the actual earnings could easily beat estimates. And better-than-expected estimates is the valuations’ best friend.

Today, Goldman, Bank of America and Citigroup will go to the earnings confessional, tomorrow Morgan Stanley, again tomorrow ASML, then on Thursday we will focus on TSM and Netflix results. Voila. Fasten your seat belt.

Fading optimism

Enthusiasm around the Chinese stimulus measures fade, as investors digest the fact that the Chinese authorities didn’t give a headline number about what they expect to spend to prop up their economy.

Whatever the plans, the Chinese authorities have not been good at communicating with investors and that will probably lead to some more profit taking in Chinese equities; vulnerability to potentially soft data is also growing with the fading enthusiasm. The CSI 300 is down by around 0.50% this morning, as Hang Seng is down by 1.34%. Copper futures come down gradually on fading China optimism, as iron ore futures consolidate in Singapore.

Crude oil, on the other hand, kicked off the week with a 4% decline. US crude took out the 50-DMA support and slipped below the major 38.2% Fibonacci retracement that distinguishes between the summer negative trend and the latest bullish reversal. As such, US crude is back to the negative trend on fading optimism that China will succeed to boost growth with its stimulus measures and on softer demand prospects for the global oil demand. In fact, OPEC just trimmed its forecast for demand growth for the third straight month, and said that the global demand will grow less than 2% this year, and around 1.6% next year. The fact that OPEC is lowering its demand forecast could bring more delays to the cartel’s production restoration plans. But the recent reports suggested that Saudi is more willing to grab market share rather than chase a higher price per barrel. Consequently, the medium-term demand/supply dynamics remain in favour of the bears with one bemol: the Middle East tensions could trigger sudden, short-term price spikes. And that fear alone could limit oil’s downside potential. The next support for US crude is seen at $70pb level.

USD extends gains

The US dollar extends gains as the combination of better-than-expected jobs and higher-than-expected inflation figures continue to push the Fed doves to the sidelines. The Fed is still expected to offer another 25bp to the US economy next month, but given the economic data of late, if these expectations were to take another direction, it would rather be in favour of a no cut. The US dollar index has regained half of its summer losses and is presently drilling above its 100-DMA. Trend and momentum indicators remain comfortably positive for a further recovery, but the overbought market conditions call for a period of consolidation of the gains before a further advance.

From the fundamental lenses, the dollar’s recent rebound makes sense as the Fed doves move aside, and other central bank doves gain field. The USDJPY, for example, is back to testing the 150 offers since the Bank of Japan (BoJ) considers no more interest rate hikes this year since its new PM said there was no need for further hikes.

The EURUSD reflects the misery of its underlying fundamentals. The stagnating German economy, topped off with a sour French outlook downgrade from Fitch, dragged the EURUSD down to 1.0888. The pair now stands a few pips above the next natural target of 200-DMA, near the 1.0875 level, and the euro bears could swallow it in one bite.

Elsewhere, the USDCAD just reached the 1.38 mark on the back of a broadly stronger US dollar and falling oil prices, while the Aussie bulls are giving in against a broadly stronger US dollar, as optimism around China is no longer enough to fuel the recent rally. The Aussie bears are gaining field below the major 38.2% Fibonacci level, which hints at a medium-term bearish reversal and the growing possibility of deeper losses.