Daily Brief - Earnings season opener: the banks!

Last Monday, the world seemed to be falling apart. Or so it seemed. Energy prices were skyrocketing, Chinese warplanes were out in full force, and the U.S. government appeared on the verge of default.

But all's well that ends well. Energy prices came down, thanks to, yes, Russia.The debt-ceiling has been pushed off to December. And China … Well, you can’t have everything.

The Dow Jones Industrial Average gained 1.2% this past week, while the S&P 500 rose 0.8%, and the Nasdaq Composite squeaked out a 0.1% advance.

Encouragingly, the market even brushed off what looked to be a surprisingly weak jobs report. The U.S. added just 194,000 jobs in September against the expectations for 500,000. Normally, a miss of that magnitude begets worries of a slowing economy. But the alternative measure of market strength - based on a household survey - showed more than 500,000 new jobs as the unemployment rate fell to 4.8%.

Particularly notable was a high number of job openings. Even rising pay—average hourly wages rose 4.6%—hasn’t been able to bring back workers who seemed to be leaving the labor force in droves. Despite appearances - unemployment rate is well above the pre-pandemic levels of 3.5% - the labor market might actually be much tighter than it looks.

Is that good news? Supply shortages and the shipping crisis are driving up prices of everything and higher labor costs will pile onto those pressures. Sooner or later, the Fed won’t be able to ignore the price headwinds. That’s the moment equities do not relish.

The reality of rising costs, from labor and raw materials, and their impact on earnings margins had begun worrying investors a while back. Just 25% of investors expect corporate profit margins to expand over the next six to 12 months, says an RBC Capital Markets survey, down from 39% in June. Some 36% now expect margins to contract, up from 19%.

Investors will get a first read on those fears when earnings season starts this coming week. The banks will be the first to step up and face the scrutiny. Reports from JPMorgan Chase, Bank of America, and Citigroup should help give the market a read on the strength of the U.S. economy, the demand for loans, and even consumer spending.

All in all, the macro crystal ball is cloudier than ever. It should be another interesting week.