Volatile stock market to calm down as earnings season starts

The last couple of weeks has been a rollercoaster ride for investors.  The S&P 500 is now swinging by more than 1% virtually every day.  This won’t last.  We expect the stock market to calm down as earnings season starts.

Fearful investors are digesting new developments in the burgeoning trade conflict between the US and China.  Every time a new development breaks, investors stampede in or out of the stock market.  For the most part, this has hit stocks hard.  Indeed, the S&P 500 is now down about 4.4% from its recent peak on March 9th.

However, investors will soon have a new focus.  Earnings season is starting this week and it should be a good one.  Accordingly, we expect the stock market to calm down as earnings season starts.

The reason for this is that analysts and investors expect earnings to soar by a phenomenal 18% this quarter.  That is a lofty rise.  However, President Trump’s tax cuts underpin these expectations.

The big banks are up to bat first and should do particularly well

The first industry to report will be financial services.  JPMorgan, Citigroup, and Wells Fargo will kick things off on Friday, April 13th.

This should provide an initial bump to markets.  Indeed, the financial services industry should report particularly healthy profits and strong forecasts.  Rising interest rates will help banking profits because it allows lenders to charge higher interest to their borrowers.

On top of that, the big banks are also beneficiaries of the recent rise in the equity market volatility.  Large banks like JPMorgan and Citigroup have capital markets divisions that act as market makers for stocks.

A market maker gets to pocket the difference between the bid-ask spread in stock transactions.  When volatility in the equity market rises, the bid-ask spread widens.  That translates to more money in the pockets of market makers (and banks).

Finally, mergers and acquisitions announcements are up a hefty 52% this year.  That bodes well for bankers because mergers and acquisitions is a high-profit margin business.

Rising mergers and acquisitions will allow well-placed banks to guide earnings higher and trigger investor optimism.  Accordingly, get ready for the stock market to calm down as earnings season starts.

 

 

 

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Al Basoglu

I am a financial services professional with over a decade of experience in various roles. I've lived and worked abroad in 5 different countries while pursuing personal and professional challenges. My interests include markets, history and different cultures. I tend to weave all of my interest into my analysis and articles.