Q3 Earnings Are Better Than Expected, but Stimulus Reigns Supreme

We’re one day into earnings season, and so far, the market’s not too impressed. Stocks are trading flat this morning in response to “beats” from both Goldman Sachs (NYSE: GS) and Bank of America (NYSE: BAC).

Both companies exceeded earnings expectations but are now watching their share prices fall. Q4 guidance was weaker than investors had hoped for, while rock-bottom interest rates seemed to have taken their toll. Wells Fargo (NYSE: WFC) got hit the worst in this regard as it missed its Q3 estimates.

“As we look forward, the trajectory of the economic recovery remains unclear as the negative impact of COVID continues and further fiscal stimulus is uncertain, but we remain strong with our capital and liquidity levels well above regulatory minimums,” said Wells Fargo CEO Charlie Scharf.

Moving forward, interest rates aren’t expected to change. That means the next few months might prove difficult for lenders looking to grow. But overall, analysts still believe earnings will skew positive.

“On the earnings overall, so far so good,” remarked Northwestern Mutual Wealth Management chief investment strategist Brett Schutte.

“You’re going to see a broadening of earnings growth from where it was, concentrated in a few names, into more sectors and companies.”

Today’s uneventful trading session follows a market-wide drop on Tuesday, in which traders awaited more stimulus news. With Congress unable to reach an agreement on the next relief package, downside pressure is quickly mounting.

Poor corporate earnings could spark a correction if additional stimulus doesn’t arrive soon.

“Markets are now hoping for (and trading on) a smooth election, a big stimulus, the end of the pandemic, and the economy being back to 2019 normal early next year,” explained Brad McMillan, chief investment officer at Commonwealth Financial Network.

McMillan continued, adding that “while the economy continues to recover, job growth has slowed substantially even as layoffs remain very high—and we are still only halfway back to pre-pandemic employment levels.”

The sluggish labor market remains the biggest thorn in the U.S. economy’s side. After starting a red-hot recovery several months ago, private payroll adds have slowed to a crawl. Unemployment currently sits at 7.9% – a number that, while not terrible, isn’t necessarily good, either.

For the market to make another leg up, mass hirings need to resume. The October jobs report needs to be a good one.

That’s certainly a possibility, of course, but the chances of it happening are much lower without another round of stimulus.

The good news for bulls is that President Trump seems ready to negotiate a bigger deal.

“STIMULUS! Go big or go home!!!” he tweeted. POTUS’s previous offer of $1.8 trillion was declined by House Democrats, who were seeking an extra $400 billion in funds.

Now, though, House Speaker Nancy Pelosi is facing scrutiny from within her party. If Trump ups his offer further, Pelosi just might be impelled to take it.

A big stimulus deal prior to the presidential election was called “unlikely” at best and “impossible” at worst by lawmakers on both sides of the aisle.

But if Trump can get it done, it won’t matter how Q3 earnings play out. Because with a hearty helping of “government cheese,” the economy will see a marked improvement.

Even if it’s short-term and artificial in nature.


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