E-mini S&P 500
Fundamental Analysis

Renewed Investor Optimism After a Positive Start to Earnings Season

  • Rising interest rates in the US are boosting lenders’ interest incomes.
  • There is less turmoil in the market after UK’s fiscal policy u-turn.
  • Analysts expect the Fed to continue its aggressive monetary policies.

Major equity futures indexes, including the E-mini S&P 500 (ES), began the trading week with a price surge after Britain changed its economic plan. Bank of America was also the latest financial company to announce strong quarterly results, which increased optimism about the upcoming corporate earnings season.

Following the appointment of Jeremy Hunt as finance minister in Britain, several of Prime Minister Liz Truss’ fiscal initiatives that had alarmed markets in previous weeks were quickly abandoned. Hunt has been permitted to rip up almost all of Truss’s economic plans to stabilize the markets after they reacted negatively to the unfunded tax cuts she thought would stimulate growth.

Shares of Bank of America Corp rose 6.06% as the lender’s net interest income increased during the quarter despite adding $378 million to its loan-loss reserves to protect itself from a slowing economy. The rise in interest rates helped fellow financial institution Bank of NY Mellon Corp., whose shares increased 5.08%.

Lenders’ interest incomes increased overall as a result of rising rates in the third quarter, giving investors hope that the current earnings season will be able to surpass lowered expectations. Refinitiv data estimates a 3% increase in quarterly earnings, down from 4.5% at the beginning of the month and 11.1% on July 1.

S&P 500 Forward PE (Source: Refinitiv Datastream)
S&P 500 Forward PE (Source: Refinitiv Datastream)

The S&P 500 forward PE, a version of the price-to-earnings ratio that uses forecasted earnings, has fallen sharply but is still above the 20-year average. It would be good news, particularly for the E-mini S&P 500 futures, if the forward PE pushed higher.

After battling through September, usually a difficult month, US stocks are still in a bear market.

According to analysts, recent gains were also supported by better market values entering what is often a stronger season for stocks. However, abrupt Federal Reserve interest rate increases could prove problematic. The Fed’s aggressive policy will likely support major equity futures indexes.

“Right now, the Fed owns the market, and Fed policy is the key driver. They are implementing the most aggressive tightening in the shortest amount of time that we have seen in our generation, and it is important to remember that Fed policy works with a lag,” said Roland.