Morning Notes — CQ3 Earnings Season to Refocus Attention on Fundamentals

Narrative: Biden’s rising poll numbers have reduced concerns over the potential for contested election results.  Investors are still positioned for volatility around election day, but not much further with December VIX futures now priced lower than the November contract.  Biden’s wide lead has also driven increased attention on the potential for large-fiscal spending under a Democrat sweep scenario.  For now, consensus assumes the growth benefits from large-scale fiscal stimulus would outweigh the assumed potential headwinds from increased regulation and higher taxes.  In the short-run, those assumptions seem reasonable enough as it takes time for regulations to ramp and tax hikes to become effective.  For example, Biden’s proposed increases on capital gains wouldn’t likely become effective until January 2022.  But markets tend to price for events 6-9 months forward and expectations for incremental fiscal spending next year have overshot reality with one strategist using a ~$5T number or >25% of current year GDP.  The budget deficit is already close to WWII levels as a percentage of GDP and spending at that scale wouldn’t play well going into 2022 midterm elections.   

Fundamental: Fortunately, CQ3 earnings season has just started and set to ramp meaningfully over the next two weeks.  A renewed, healthy focus on fundamentals should keep markets more anchored in reality. 

Technical: We continue to expect the S&P 500 will test the September 2 record high of 3580 in the weeks ahead.  At this point, market internals remain healthy and aligned with cross market indicators.  There’s been some small increase in equity positioning and a similar erosion to bearish equity sentiment, but not at a scale yet to raise concerns of a top.