Are Stock Bulls Back On Track?

Stock bulls like what they see from Q3 earnings so far, with big banks delivering results well above expectations, much like the majority of companies that have reported so far.

Earnings beats have actually been coming in at a wider margin than average, contrary to lingering fears that supply chain disruptions, material shortages, and climbing costs would lead to disappointing Q3 results.

The big beats now have S&P 500 companies on track to post +30% earnings growth for Q3. Most Wall Street insiders are now expecting Q4 earnings to show right around +20% earnings growth.

Today’s earnings highlights include Albertsons and State Street. Some of the big names reporting later this week include Netflix, Haliburton, Johnson & Johnson, Unite Airlines, and Procter & Gamble on Tuesday; and Biogen, IBM, Verizon, and Tesla on Wednesday; American Airlines, AT&T, Chipotle, Intel, Snapchat, and Southwest Airlines on Thursday.

The following week is even more highly anticipated as many of the biggest names in the stock market will be reporting.

In economic data today, Industrial Production for September is expected to dip due to a combination of Hurricane Ida and supply chain constraints. Supply chain challenges also likely lowered builder sentiment in the October NAHB Housing Market Index due today as well. The supply-side shortages of both materials and labor continue to weigh on economic growth outlooks for the last part of 2021.

However, most bullish analysts have adjusted their 2022 growth projections higher, believing lost growth this year will be made up next year. The labor market is expected to get a boost thanks partially to the dramatic decline in Covid cases, which are down nearly -50% since early-September.

The extreme worker shortage in some sectors has already led to rapid wage growth with hourly earnings in September up +4.6%, led by an increase of nearly +11% in leisure and hospitality. That is what’s considered “sticky” inflation, meaning that it is not likely going to be reversed.

Likewise for consumer goods’ prices that have been creeping higher as manufacturers try to offset higher costs. If wage growth can mostly keep pace with inflation, bulls will likely remain less concerned that rising prices will crush economic growth. In fact, Retail Sales released Friday showed no signs of consumer spending slowing down with sales climbing +15% in September, despite obviously higher costs for many goods. The thought of the economy heating back up quickly is both good and somewhat bad.

There now seems to be more talk on Wall Street about the likelihood of two rates hikes next year rather than just one. There’s actually even some talk of perhaps three rate hikes being possible in 2022, especially if the supply-chain complications continue to create higher prices and fuel higher inflation.

The biggest wildcard right now appears to be the global energy shortage which is already pushing up costs for both consumers and manufacturers and threatens to accelerate headline inflation far beyond wage growth.

Any energy “crisis” will likely only be temporary but it still potentially translates to several quarters of slower growth than many Wall Street bulls have been penciling. If it leads to a massive surge higher in inflation in the months ahead, it also could also pressure the Federal Reserve to pull forward its timeline to begin hiking interest rates.

SP500 futures are testing daily MA50. With the strong accumulation in this market, I will not be surprised to see a base-building above moving average. If that happens, investors will gain more confidence. Thus, we can see money flowing aggressively into the stock market again. The weakness of the USD gives additional strength for indexes. In that case, bulls will target at least 4600 (important Gann level on a daily chart).

Breaking below 4250 is a game-changer. However, in the absence of bearish macroeconomic factors, we have more chances to see a bullish scenario.