Mixed first quarter; inflation and growing concerns about the Fed keep the bulls at bay

Chart of the week

Source: Isabelnet, 10/13/2021

The chart shows the price performance of the S&P 500 Index, compared to the earnings per share (EPS: earnings per share) performance.

Why it matters:

The price of a stock is calculated by discounting all future earnings by the expected inflation rate. Political crises come and go, but the key influence on stock prices is company earnings. 

In the last 1.5 years, the index has mostly been above the line of expected profits. This reflects the hope for positive surprises in earnings announcements. Currently, however, most market participants are pessimistic and expect further disappointments. If the earnings figures and outlook published in the coming weeks are not as bad as expected, this could be the basis for a strong upward movement until Christmas (Christmas rally).

Mixed first quarterly figures

The published first earnings figures for the third quarter of 2021 show a mixed picture. The banks (BlackRock and JPM) or SAP are convincing so far. The airlines (Delta) and the credit card companies are unfortunately disappointing.

Source: Youtube Markus Koch Wall Street on 10/12/2021, timestamp: 8:13 a.m.

This chart shows the change in the Citibank Economic Surprise Index in the US, Europe and China this year. The CESI is a very common index to watch. In the past, it has often predicted economic developments extremely well. 

A value above zero indicates that market participants expect positive surprises when economic and company figures are published. Currently, most market participants are expecting negative surprises. In the past, this has been a good time to buy.

Inflation and growing concerns on a misguided decision by the U.S. Federal Reserve are keeping bulls at bay

Source: Twitter: Liz Ann Sonders (CIO of Charles Schwaab), @LizAnnSonders, 10/13/2021.

The chart shows the sentiment indicator calculated by the broker, Charles Schwab in the US. The indicator is used as a counter indicator. That is, a high value showing euphoria is used to sell. In recent weeks, the euphoria has cooled down considerably. 

This was mainly due to the fact that many market participants now expect two more key interest rate hikes by the U.S. Federal Reserve before the end of the year.

Source: Isabelnet, 10/13/2021


The chart shows the probability with which most market participants expect two key interest rate hikes by the U.S. Federal Reserve before the end of the year. In July, the value was still at 30%, now at over 70%. Interest rate hikes are bad for the stock markets.

The big question that arises is whether the central banks are right or if the economy is still weakened from the Covid crisis possibly leading us to a recession.

Source: Youtube Markus Koch Wall Street from 12.10.2021, timestamp: 8.42


The US bank JP Morgan has calculated that inflation (blue and dashed line) will fall again even if the oil price still rises to USD 100 and remains at this high level. This suggests that the central bank may be too quick on slowing the economy this year.

Disclaimer:

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