Strong Corporate Earnings Should Sustain Stock Market Rally

A strong Q421 corporate earnings season should sustain the stock market rally in January.  It should help the market overcome selling typically seen early in the month after a "Santa Claus" rally.  In addition, Fed policy should not change, even if some of the upcoming key US economic data are above target.  The Fed should want to give its latest two sped-up taperings time to work.  And, it will probably want to keep policy steady soon after Powell's renomination hearing this month, trying to avoid undermining his credibility.  While there are reasons to expect above-target prints for December Payrolls and CPI, there are other reasons to believe they will be followed by more moderate prints in the following month or so (see last week's blog).  So, the Fed should be patient if high December prints turn out to be the case.

Consensus looks for about a 20% (y/y) increase in Q421 corporate earnings, versus 39% in Q321.  Although this would be the lowest quarterly increase for the year, it still would be historically high.  Most of the macroeconomic evidence, indeed, point to a larger y/y increase in Q421 than in Q321.  A pickup in Real GDP Growth and an improvement in profit margins, as prices sped up relative to wages, would appear to have lifted domestic profits.  Similarly, higher oil prices should boost profits in this industry.  But, a stronger dollar (thanks to easier year-ago comparison) and softer economic activity abroad should hurt earnings outside of the US.

                                                                                                                                          Markit
                                                                                                                                          Eurozone                        Real GDP     Oil Prices        Trade-Weighted Dollar    AHE     Core CPI    PMI  
                [                                y/y percent change                                                   ]    (level)
Q119            3.2                -12.8                 +7.9                             3.2           2.1               51.9 
Q219            2.7                -12.2                 +5.9                             3.1           2.1               47.8    
Q319            2.1                -19.2                 +3.6                             3.2           2.3               46.4
Q419            2.4                  -3.6                 +1.7                             3.2           2.3               46.2

Q120           -5.0                -16.5                 +2.9                             3.1           2.3               47.2

Q220         -10.6                -53.5                 +5.9                             6.5           1.4               40.1

Q320           -2.8                -27.8                 +1.0                             4.8           1.7               52.4

Q420           -2.4                -25.5                  -1.9                             4.8           1.6               54.6

 

Q121            0.4                  26.3                 -4.4                              4.9           1.4               58.3   

Q221          12.2                  32.1                 -8.3                              1.2           3.4               63.1 

Q321            4.9                  72.7                 -3.4                              4.2           4.1               60.9

Q421            5.7 *               80.3                +1.0                              4.6           5.0               58.2                                                                                                    

* Based on the Atlanta Fed Model's latest projection of +7.6% (q/q, saar). 

The latest Unemployment Claims data point to a speedup in December Payrolls, but hint at a slowing in labor market improvement over the month.  Both Initial and Continuing Claims are below their levels in the November Payroll Survey Week.  But, Initial Claims have flattened out over the past several weeks.