Income from finance and interest rates

Key insights

• Earnings season outlook
• Signals from the bond market
• Market volatility and specific sectors

Stocks rose nearly 1% across the board last week as earnings season got underway and economic data continued to support hopes of a soft landing. If there's a potential canary in the coal mine, it's bonds, whose interest rates have risen at the long end of the yield curve and could impact returns. But first, let's talk about earnings and the week ahead.

While most people don't expect earnings season to truly begin until after financials are released, a handful of companies have also filed reports, along with JP Morgan and Wells Fargo. Based on these reports and the forecasts, earnings are on a path that would see a growth rate of just over 4%. However, there is a big caveat here.

According to FactSet, actual earnings exceeded estimates in 37 of the past 40 quarters. In fact, reported earnings were almost 7% higher than forecast. So if history is anything to go by, S&P 500 gains will likely be closer to 7%, and that 7% number will likely serve as the so-called “whisper number” we often hear about.

While the overall growth rate of index earnings is important in terms of fundamental valuation, it will be equally important to listen to what companies have to say looking forward. Forward-looking statements are always important, but particularly this quarter we could receive nuanced forecasts with hedged wording based on the election results.

Looking at this week's economic calendar, I see no report or reports that are likely to move the markets much. However, we have presentations from members of the Fed every day except Wednesday. After the minutes of the Federal Open Market Committee's (FOMC) latest meeting were released last week, I'm looking for clues for the next meeting, which will take place just two days after the election. And that brings us back to bonds.

When analysts talk about the yield curve, they are talking about interest rates over different time periods. Traditionally, longer-term bonds offer a higher return than shorter-term bonds because the money is tied up over a longer period of time. We are coming out of a situation where the curve was inverted for an extended period of time. This means that short-term investments pay more interest than longer-term investments. This is what happens when markets are nervous about the current environment. The curve has now “normalized,” but interest rates at the long end have not only recovered, they have actually skyrocketed. This suggests that instead of worrying less in the short term, we worry more as we get away with time.

At the beginning of today's column, I suggested how the bond situation could affect earnings. With long-term interest rates rising, I wonder if we will hear concerns from companies as we discuss future guidance. The bond market is expressing some caution, and I want to see if CEOs express similar concerns.

This week in the earnings calendar we'll hear from a number of companies across the financial sector. Bank of America, Citigroup, Goldman Sachs and Schwab are all reporting ahead of Tuesday's opening, as is Walgreens. Later in the week, on Thursday, we'll hear from Netflix. There have been several calls for a price increase at Netflix, even though the streamer has already recently increased prices and restricted password sharing.

Today, with the bond market closed for the holiday, I don't expect stocks to perform much. Such days are rare, but often quiet and with low volume. If there are two things I'm watching today, it's VIX and casino stocks. Although markets had a good week last week, it is worth noting that volatility increased by 6% this week. This could be due to many things, from earnings to voting, but it's worth keeping an eye on. And then a new leader was elected in Macau over the weekend. One of its initiatives is to reduce the number of U.S. companies that own and operate casinos. Several casino stocks are trading lower in premarket trading. As always, I would stick with your investment plans and long-term goals.