Global equities have settled in a trading range and could stay there for until the US election. Market participants need a new narrative. Yesterday, a new narrative was forming as reflation trades were put on again (growth stocks, small caps, long-term yields higher, gold etc.) partly driven by a positive spin on a Biden victory and higher probability of Democrats delivering a clean sweep. In that case, the recent House bills of $2.2trn could move through the Senate and deliver a sizeable boost to the US economy.
Q3 earnings must deliver
That is a strong narrative, but in the meantime equity markets need to see Q3 earnings rebound. Elevated equity valuations are discounting a significant rebound in earnings and analyst estimates are also reflecting this with expectations looking for a 49% q/q increase in Q3 earnings per share in the S&P 500 Index. In other words, there are steep expectations going into the Q3 earnings season which really kicks into gear next week with US financials. Despite a strong rebound in earnings analysts do not expect earnings to soar past pre Covid-19 earnings until Q2 2021.