Focus on Q4: Macro threats vs. earnings season expectations

In September,  inflation fears returned to the forefront for investors, a trend that was reflected directly in the bond markets. With the price of crude oil remaining near the $100 mark, core inflation is proving stubborn, forcing central banks to maintain a cautious approach.

The US Federal Reserve’s (Fed) interest rate hike of 0.25 percentage points in September, coupled with its message of "higher rates for longer" has pushed up US government bond yields. Rising interest rates reduce the attractiveness of the stock market, particularly for highly valued growth companies. However, the US economy has demonstrated exceptional resilience, keeping recession risks at bay for the time being.

The European Central Bank’s (ECB) interest rate hike to 2.50 percent in September is also takingits toll on European companies. High energy costs are putting pressure on European industry, particularly in Germany, while high interest rates are simultaneously stifling investment. There is now a clear divergence has emerged between the US and European economies, with the US economy proving to be more resilient to interest rates than Europe’s.

Despite macroeconomic headwinds, both S&P 500 and the NASDAQ have remained close to their record highs, with the latter even reaching new all-time highs. This is largely because stock market earnings growth expectations depend on the shoulders of tech giants and the semiconductor sector. The upcoming Q3 earnings season will need to meet high expectations.

Significant revenue and earnings growth is expected from semiconductor companies such as Nvidia. Investors are also closely monitoring whether hyperscalers such as Microsoft, Amazon, and Google will maintain their substantial investments in massive infrastructure and capital expenditure (CapEx) investments in data centers and AI chips.

In the United States, Q3 earnings forecasts remain strong, specifically driven  by the technology sector. In contrast, DAX companies and heavy industry firms in Europe are expressing concern overmargin pressures. This makes the technology sector stand out even more crowded compared to many other sectors.

Despite briefly dipping below it in mid-September, the S&P 500 index has managed to remain relatively close to its all-time highs and above the technically significant 50-day simple moving average (blue), which is considered to be a key technical indcatorr. The upcoming earnings season may reveal whether the index can continue its upward trend, which is currently being driven by strong earnings expectations, or whether elevated inflation and interest rates will increasingly erode investor confidence. Disappointing corporate earnings would also introduce further uncertainty into the market.

Germany’s benchmark DAX index reflects the challenges facing European industry. The index is lagging behind its US counterparts and facing resistance from its short-term moving averages (EMA25 in yellow and SMA50 in blue). High energy costs and the ECB’s tight monetary stance are creating headwinds. To prevent the technical outlook from deteriorating further, the index needs to remain above the key SMA200 moving average (red) to avoid a more pronounced downtrend.

Historically, equity market performance during the final quarter of the year has varied across different periods. Looking ahead, market participants are expected to closely monitor developments in bond markets, the interest rate environment and upcoming third-quarter earnings releases, particularly from companies exposed to AI and semiconductor trends. Future market performance cannot be predicted and remains subject to a range of macroeconomic and company-specific factors.

●    SMA200: 200-Day Moving Average, red.
●    SMA50: 50-Day Moving Average, blue.
●    EMA25: 25-Day Exponential Moving Average, yellow.