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Key Takeaways

  • Goldman Sachs and JPMorgan Chase start off big-bank earnings
  • Virgin Galactic successfully completes first fully-crewed flight to edge of space
  • Consumer and producer inflation data expected out later this week

(Monday Market Open) The market is looking a bit like the next generation space race we’re seeing. In a similar fashion to Virgin Galactic‘s (SPCE) first fully-crewed flight to the edge of space on Sunday, the market has headed toward the stars with a record finish last week.

But trading sentiment seems to be a little more down to earth as we start this week. Perhaps the market is catching its breath ahead of major bank earnings that kick earnings season into high gear later this week.

The banks can often set the tone for earnings season, and the releases from these big banks serve as an interesting–and often illuminating–glimpse of the state of commerce in the United States and across the world. The housing market, consumer credit, mergers & acquisitions, investment banking and trading, global payment systems–these are but a few of the areas in which the nation’s largest financial institutions play a key role. So when they report earnings and host their quarterly conference calls, analysts and investors typically read and listen closely.

The Financials sector helped the market end last week on a high note, with all three of the main U.S. indices closing at record levels. Gains in the 10-year Treasury yield probably helped financial companies, and there may also have been a case of buying the dip.

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It’s arguable that seeing financial stocks leading the market is a good sign for economic health. For a long time banks were lagging the broader market because of ultra-low interest rates and worries about the economy during the pandemic, as loan-loss provisions sapped their profitability.

Now, banks aren’t having to set aside as much money for potentially bad loans, longer term rates are higher–even with a recent pullback the 10-year yield is up substantially from a year ago–and the outlook for the economy, and thus loan activity, is brighter.

Tomorrow we’ll see reports from Goldman Sachs (GS) and JPMorgan Chase (JPM), while Wednesday holds earnings results from Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C). Morgan Stanley (MS) reports on Thursday.

This morning, it appears that tech and growth stocks are doing better than other parts of the stock market as yields in the bond market fall. Even though today may be a little bit of a waiting game as we head into the bank earnings, the bulls are probably wanting to see some broader follow-through from Friday’s record closes.

In economic data, this week the market is scheduled to get consumer and producer price numbers for June. (See more on consumer prices below.)

Other economic data this week include industrial production numbers, retail sales figures, and the preliminary consumer sentiment index from the University of Michigan. And don’t forget the Fed’s Beige Book.

Retail sales figures can have a high impact on trading, for better or for worse, because they show how consumers have been feeling about discretionary purchases. If people are buying more things they don’t absolutely have to have, it can be an indicator that they’re feeling good about their employment prospects and how the economy in general is doing. Retail sales for June are expected to show a 0.6% drop, which would mark an improvement over the previous month’s 1.3% slide

Meanwhile, the consumer sentiment index is expected to come in at 86.3, an improvement over the prior month’s 85.5. And while there’s not a number attached to the Fed’s Beige Book, that report provides anecdotes from around the country about what people are thinking about business conditions, which can form a valuable qualitative snapshot.

Outside the banking industry, other high-profile companies opening their books include PepsiCo (PEP) and Delta Air Lines (DAL). (See more about the outlook for this earnings season below.)

As results from airlines come in this week and next, it could be interesting to hear about how the global reopening is going. While vaccine rollouts in the U.S. have helped open travel back up, other parts of the globe aren’t faring as well. And worries about the Delta variant of COVID-19 don’t seem to be helping things.

Beyond the numbers from DAL week and United Airlines (UAL) and American Airlines (AAL) next week, the market may be looking for guidance from their executives about the state of global travel as a proxy for economic health.

Chart of the Day: Listening to the Bond Market: All eyes have been on the 10-year Treasury yield, represented here by the 10-Year Treasury Note Yield Index (TNX–candlestick). As you can see from the Cboe Volatility Index (VIX–purple line) the recent dip in the yield coincided with rising fears among investors and traders. But it seems that fears about the economic recovery have eased along with Friday’s rise in yield. Data source: Cboe Global Markets. For illustrative purposes only. Past performance does not guarantee future results.

Is the Bond Market Trying to Tell Us Something? The core CPI reading this week is expected to show a 0.5% rise, which would mark a slowing from the previous month’s 0.7% gain. If such a slowdown does happen, the market might take it as a sign of confirmation to what the bond market has been telling us. A possible interpretation could be that the edge of rising prices is wearing off and inflation could indeed be transitory like the Fed has been predicting, which would correlate with declines in the 10-year Treasury yield. At the same time, there could still be enough price gains to limit worries about the economic recovery, which the rebound in the 10-year yield on Friday might be attesting to.

Best of Both Worlds? If that scenario plays out, it might prove to be a bit of a sweet spot for the market. With lower longer-term yields, that could open up more investment into leadership stocks such as the FAANG names and other tech and growth equities. At the same time, there is still clearly growth in the economy, which bodes well for cyclical stocks like banks, commodities producers and travel companies. The latest Atlanta Fed GDPNow model estimate for second quarter real GDP growth came in on Friday at 7.9%, up from 7.8% on July 2. If we can see numbers like that but also see inflation moderate, that arguably bodes well for the market as well as the wider economy.

Will History Repeat Itself? As of Friday, the SPX was expected to report annual earnings growth of 64% during this earnings season, but the actual reports could end up being higher, according to FactSet (FDS). “Based on the five-year average improvement in earnings growth during each earnings season due to companies reporting positive earnings surprises, it is likely the index will report earnings growth at or above 69% for the second quarter,” FactSet said in a blog post on Friday. That would mark the highest earnings growth reported for the index in more than a decade, the financial data and software company said.

Good Trading,

JJ

@TDAJJKinahan

TD Ameritrade(R) commentary for educational purposes only. Member SIPC.

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