As it is usual each year in October, the 3rd quarter earnings season begins and because the market activity is generally elevated during this period, CFD traders are increasingly active on stocks and some of the leading indices. Things are even more challenging this year, considering we have a global pandemic, the US election, and a whole debacle on new stimulus in the United States, all of which had proven to be major catalyzers for valuations.
# Tech and healthcare – still the big gainers
In our previous article, we’ve talked about what a K-shaped recovery means. As we begin a new earnings season, the outperformance of several sectors like tech and healthcare should not surprise anyone. These companies have been able to adapt fast to the “new normal” forced by the COVID-19 pandemic, and as a result, their profit margins are for now intact.
J&J already reported the earnings at the time of writing, outperforming both in terms of EPS and revenue, while also raising slightly the guidance for the year. The same happened with some banks, which had managed to top estimates mainly because the credit loss provisions were much lower than anticipated by analysts.
# Less focus on earnings, more on new stimulus
A US dollar recovery had partly been postponed by increased confidence a new stimulus bill will be passed before the election. However, there is a big gap between the House of Representatives, the White House, and the Senate, which is gradually reducing the probability of a major deal this month.
It would be important for CFD traders to focus on the stimulus narrative because that had been one of the main drivers for the markets in the past several weeks. Better-than-expected earnings so far had been sufficient to spur new stock buying, happening exactly at a time when expectations around stimulus are vanishing.
# Cautious trading activity due to the US election
Last month we’ve seen the US stock market indices drop by approximately 10% and even though it was a good opportunity for big market players to step in again, some of the latest data is not encouraging. More specifically, insider buying activity remains muted, communicating there are a lot of participants wanting to see what the outcome of the election will be.
The same cautiousness would be appropriate for short-term CFD traders, as well, considering we could see some wild market swings intra-day. However, we expect plenty of trading opportunities to occur until the election, as the valuations would be extremely sensitive to any unexpected headline.