- US Treasury yields reached a 12-week high on Monday.
- This week, markets will focus on business activity data from the US.
- So far, 83.1% of S&P 500 companies reported better-than-expected earnings.
Equities ended in the red on Monday as Treasury yields rose, reflecting a decline in Fed rate cut expectations. Experts observed that market participants were likely taking profits before a week full of earnings reports from major companies such as Tesla and Coca-Cola.
US Treasury yields hit a 12-week high on Monday, signaling growing expectations for gradual rate cuts in the US. As US data revealed a resilient economy, yields and the dollar have recovered in recent weeks. Therefore, the fears of a looming recession eased, relieving pressure on the Fed to lower borrowing costs.
Consequently, markets moved from pricing a 50-bps rate cut in November to a 25-bps cut. Ideally, rate cuts are bullish for equities since lower borrowing costs spur growth. Shifting from anticipating aggressive cuts to a more gradual approach could negatively impact risk sentiment.
This week, markets will focus on business activity data from the US. The manufacturing and services PMI numbers will continue shaping the outlook for rate cuts. A strong performance in these sectors will increase bets for a pause in November, hurting equities. On the other hand, some weakness could solidify bets for a 25-bps rate cut.
Earnings expectations (Source: Bloomberg MLIV Pulse surveys)
Meanwhile, markets are watching incoming earnings reports, which have revealed a better-than-expected performance. According to data on Friday, 83.1% of S&P 500 companies reported better-than-expected earnings so far. Consequently, analysts believe investors are taking profits ahead of more reports. This week, 114 companies in the S&P 500 will report, with some major ones including Tesla and Coca-Cola. More upbeat earnings could boost equities and support a rebound.
Elsewhere, markets are closely monitoring the presidential race between Trump and Kamala. Recent polls have suggested that Trump might be in the lead, boosting stocks. The famous Trump trade started when Trump first won the election in 2016. His policies, taxes, and tariffs favored domestic business and drove inflation.
Therefore, there is a chance the same will happen if he wins in November. As a result, market participants are anticipating such an outcome and buying more stocks. However, this sets the stage for a lot of market turmoil if the outcome is unexpected.
