What Banks' Q3 Earnings Mean for the Stock Market

(Please enjoy this updated version of my weekly commentary published October 20, 2021 from the POWR Value newsletter).

The market rose last week as banks opened the third-quarter earnings season with a bang. On Thursday, Bank of America (BAC), Morgan Stanley (MS), and Wells Fargo (WFC) posted strong results before the opening bell, and stocks surged on the day.

Banks are increasingly writing more consumer loans as the economy grows. The fact that top banks exceeded expectations bodes well for the economy as banks are considered economic bellwethers.

However, the strong economic recovery has put a strain on supply chains. That's why I will be reading earnings call transcripts to see what executives have to say about price increases, labor challenges, and supply chain disruptions.

Even with many companies so far navigating these issues, it will be helpful to hear what they say about the next quarter. Plus, even though inflation is still a concern, it is expected to head back to pre-pandemic levels next year, as supply chain issues should be ironed out.

This will coincide with the expectation of falling COVID-19 infections. Even now, COVID-19 infections are down more than 40% from August as vaccination rates continue to rise.

The Labor Department also reported that jobless claims came in at 293,000 for the week ending October 9, well below the consensus estimate for 318,000. This was the first time initial claims fell below 300,000 since March 2020.

Stocks were up again on Friday as the S&P 500 had its best week since July. The Dow Jones Industrial almost rose 1,000 points on better-than-expected earnings so far. Even with the volatility of the past six weeks, the S&P 500 is pretty close to its all-time high, indicating that investor sentiment is still optimistic.

Another positive sign was the Census Bureau's September retail sales report. It showed a 13.9% year-over-year increase in U.S. retail spending. The figure was also a 0.7% increase over August's figure. This increase reflects rising demand and higher prices paid for goods.

So even with supply chain, labor shortages, and inflation concerns, the economy continues to improve, corporate profits are stronger than expected, and the pandemic looks to be plateauing. The fourth quarter is also projected to be solid. This should help support stock prices in the weeks ahead.

Both the S&P 500 and Nasdaq finished higher on Monday, which was the fourth straight day of gains. Even with the high CPI and PPI figures last week, investors remain optimistic as corporate profits look strong in the face of rising prices.

Stocks continued their advance on Tuesday as more earnings results topped Wall Street expectations. The S&P 500 rose for a fifth straight session, which marks its longest winning streak since August.

As more companies release their third-quarter results, we are getting a sense that many companies have been able to work through supply issues by passing on costs to consumers.

As of Monday, 80% of S&P 500 companies reported a positive earnings surprise, and 83% have reported a positive revenue surprise. So far for the quarter, the blended earnings growth rate for the S&P 500 is 30.0%. This figure is the combination of the actual results reported and estimated results not yet reported.

The blended profit margin for the S&P 500 is 12.3%, which is so far above last year's profit margin and well above the five-year average of 10.9%.

Stocks advanced again today, with the Dow reaching a new all-time intraday record, as more companies reported better than expected earnings results. As of now, it's clear that any concerns over a third-quarter drop in growth were premature.

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $451.84 per share on Thursday morning, down $0.57 (-0.13%). Year-to-date, SPY has gained 22.03%, versus a % rise in the benchmark S&P 500 index during the same period.

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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