A pretty robust U.S. corporate announcements last week indicated that there’s a high chance for corporate America to get out of a profit recession which lasted for five consecutive quarters. According to factset, 78% of S&P 500 companies reported earnings that beat on the bottom-line and 65% beat on the top-line.
Upside earnings surprises is way above the historic average of 66%, which could be interpreted as good news for the overstretched equities valuations, however earning guidance is not showing the same trend with 10 out of 17 S&P 500 companies issuing a negative EPS guidance so far.
Another worrying signal is the level of cash sitting on the sidelines now. According to Blackrock, $50 trillion of worldwide holdings are in cash now, showing that many investors are concerned about the markets next move whether it’s in equities or fixed income.
The week ahead is very busy on the corporate front with more than third of S&P 500 companies reporting results. Many investors would like to know how many Iphones apple sold in the third quarter, while others are more interested in the Energy sector which was the main drag on earnings with companies such as Exxon Mobil and Chevron. General Motors, Alphabet, Caterpillar, P&G, Mylan, MasterCard, and Hershey are only a few among those reporting next week, so lot of data to digest.
On the macro front, third quarter GDP figures from UK and the US will be closely monitored by investors.
On Thursday, UK will offer a first glimpse into the performance of the economy after voting to leave the European Union. The flash Q3 GDP data is forecasted to show 0.3% growth compared to last year, less than half of second quarter’s 0.7%. Albeit growth is slowing, the immediate impact of the Brexit vote on the economy is far less than what had been expected, but this is likely to change if the divorce negotiations went the hard way, were a recession will be very hard to escape.
In the U.S. we’re looking for an opposite scenario, were economic activity likely picked up after a disappointing first half of 2016. Markets are looking for a 2.5% economic growth in Q3 from a 1.4% in Q2. Any figure below 2% will likely kill the idea of Fed raising rates in December, and thus pull back the dollar from its seven-month high.