For those of you who would prefer to listen:
Forget Football and Baseball for a minute. It is Earnings Season that kicked off this week. It’s that time again when Corporate America submits its report cards. Nearly 75% of the S&P 500 companies, measured by market cap, are scheduled to report in October. The Street expects earnings to increase +8.0% in Q3, compared to a year ago. That would be a solid clip should the estimates become fact. What’s more, revenue is expected to increase +6.3%. Estimates have increased since the quarter started in July. The Street had been looking for a 4.8% increase for Q3.
It’s no surprise where the earnings growth is coming from. Tech is the biggest driver, with an estimated 20.9% growth rate expected in the wake of the AI trade. Utilitiesare the second fastest growers at an estimated 17.1%. Utility companies have seen a renaissance of growth as they are expected to help power AI. Materialsand Financials are both estimated to grow earnings by 13%. These are the outsized growers, which no surprise have also been fueling the Stock Market. You’ve heard me say it time and again: It’s earnings, more than anything else, that drive stock prices.
For calendar year 2025, S&P earnings are estimated to be a combined $263 per share. What’s more, earnings are expected to accelerate next year. The Street is now modeling over $300 for the S&P in 2026 which would translate to another 13% growth on top of that estimated $263 number for 2025. That has the Stock Market currently trading at some pretty lofty levels. It’s trading at 25X this year’s estimates and 22X next. These are earnings multiples that rival the Dot-com days. But the anticipated accelerated growth and Fed interest rate cuts produce a magical elixir for stocks. That’s what makes Earnings Season so valuable. It’s the time where we investors can focus on facts not just hype.
Traditionally, it’s the Big Banks that lead things off. JP Morgan was up first. America’s largest bank reported record trading revenue for its brokerage business. That makes sense with the Market continuing to hit fresh all-time highs. The performance chase is on. Bank of America saw growth in every business line, reflecting the underlying strength in the financial system. Earnings grew over 31% on the back of 11% revenue growth. It’s pretty impressive. JP Morgan Chase and BofA are where so many Americans access their money. Both companies raised the outlook for the rest of the year.
BlackRock, the largest asset manager in the world, saw broad-based strength across all segments. The company now has over $13 Trillion in assets. Goldman Sachs had its best quarter ever. Goldman’s Investment Banking revenues jumped 40% in Q3. Morgan Stanley experienced a surge in its Investment Banking arm too. One important takeaway from the Financials: Deal-making is back. It reflects optimism about future growth. That’s always a good thing. It’s when there’s too much optimism that problems tend to rise. We’re paying very close attention to that.
JP Morgan CEO Jamie Dimon always grabs investor attention when he talks. He had this to say about the current environment: ”While there have been some signs of a softening, particularly in job growth, the U.S. Economy generally remained resilient. However, there continues to be a heightened degree of uncertainty stemming from complex geopolitical conditions, tariffs and trade uncertainty, elevated asset prices and the risk of sticky inflation”. That’s sort of a Goldilocks situation, something our Mike Harris has emphasized all year.
But it was Dimon’s comments about the Credit Market which stole headlines and triggered some more volatility. He indicated that risks were on the rise after JP Morgan had to take a $170 Million write-off due to the bankruptcy of a subprime car lender. There was also an auto parts manufacturer that went bankrupt too which Dimon analogized as financial cockroaches. “I probably shouldn’t say this, but when you see one cockroach, there are probably more”. You’re probably thinking, that’s not good. You don’t need a CFA to know that cockroaches aren’t a welcome sight. They’re sort of a problem in the kitchen.
Back to the Market:
That cockroach claim sent a bit of a tizzy into the Market upon impact. But most on the Street were quick to dismiss. Big Bank stocks did well this week on the back of their strong earnings. It was the smaller, regional banks that saw their stocks suffer. Credit spreads have widened a little bit of late, indicating there is some stress building in the system. Lending standards lowered which could lead to increased defaults. Regional banks are more exposed there.
Regional banks had their worst week since Silicon Valley Bank failed in 2023. It was a shoot first and ask questions later situation. There are concerns that private credit, which has permeated all levels of the Market, has some growing infections. The problem is some of that segment in the Market is illiquid and opaque. There are times that, you don’t know until it’s too late. That’s why we pay such close attention to the Bond Market. It tends to sniff that stuff out fast.
There is nothing new when it comes to the Government Shutdown. Our Washington sources say both parties are stubbornly set in their ways, believing their side is winning. It sure doesn’t seem like anyone wins with a shutdown. It’s now day 17. There has been no new economic data delivered since. But the Market still doesn’t seem to care. US-China trade tensions continue. They tighten, then they loosen. There’s a different headline daily. Sometimes hourly. It’s not clear what to believe there either.
For now, it’s still theAI trade that’s the driver. Taiwan Semiconductor raised its revenue guidance again, highlighting the AI “megatrend”. Pretty much all AI chips go through Taiwan. The company nowprojects mid-30% revenue growth for the year. It’s also raising its capital spending estimate to $40 Billion amidst the relentless AI demand. Management said demand is even stronger now than it believed just 3 months ago.
Buy-the-dip has worked pretty much since 2022. Every sell-off has seen stocks scooped up, leading to new record highs. Retail investors have been active buyers. It’s forced institutions to chase. In some cases, they were too negative and had to cover their shorts. That’s led to a booming short-squeeze. The S&P just wrapped up its best week since August. Gold keeps ripping too. Interestingly, the Dollar has stopped its decline. Volatility has returned. That’s very on-brand for October.
We’ve covered the AI bubble a bunch. It’s contracted a bit. There’s also a bubble in people calling this a bubble. Bubbles generally don’t burst when they’re widely identified. Besides, it most likely won’t be an AI issue that ultimately bursts the bubble. It will inevitably be something unforeseen. With such massive capital expenditures fueling Artificial Intelligence, it could very well come from the Credit Market. Were these canaries or cockroaches? One is a pretty yellow bird that were often used in coal mines to detect lethal gases. It was a warning tool. Warning tools are useful. Cockroaches symbolize impurities as well as dark, hidden problems. Where there’s one, there’s usually several. And they reproduce quickly. I’d say it’s a unique person that likes the cockroach.
We’re on the lookout for all kind of Market signals, well beyond birds and bugs. Another correction is due. But they seldom come when everyone is waiting for one. The fact is, the trend is decisively up. Besides, bubbles don’t tend to burst while interest rates are being cut. That said, I don’t need to remind you that there’s little that’s normal in these 2020s.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
