Investors have a lot of things to consider this week with a flood of corporate earnings reports and the Federal Reserve’s most recent decision on its monetary policy. On October 28, the central bank left interest rates unchanged, as was generally expected. Now, all eyes are on whether companies can manage their costs during a period of sustained inflation. Monetary policy statements published by the Federal Reserve review federal funds rate decisions.
Earnings Season Takes Center Stage
Major companies in the areas of technology, finance, and consumer products have released their third-quarter earnings reports over the past few weeks. Analysts are examining company profit margins to determine if rising interest rates and increased cost of supplies may be affecting the bottom line of businesses. Generally, when a company exceeds analyst expectations for its earnings, it experiences better stock price performance than a company that only meets those expectations. Equity market performance reports published by the S&P Global evaluate corporate earnings season results.
Financial services companies are under fire because of how they respond to changes in interest rate policies. Most of the time when interest rates go up, banks make more money because they can charge borrowers higher interest rates than what they pay savers. However, this is not always true. If there are fewer people who want to take out loans at the higher interest rate, then the bank will lose money. Many of the small and medium-sized banks (regional banks) that we talk to say that they believe that less people will be taking out loans this year, which means that their earnings may be lower than expected. Banking sector reviews published by the American Bankers Association analyze regional bank lending trends and net interest margins.
The Fed’s Role in Market Direction
The Federal Reserve’s decision to maintain its target federal funds rate between 3.75 percent and 4.00 percent was consistent with what many expected to happen prior to the start of this month’s meeting. In fact, futures traders had estimated that there was a 87% chance that the Fed would decide not to raise rates at all when they released their statement. Now that the Fed has made its decision, we can expect that the focus will shift back to the last meeting of the year which will take place in December. Financial market forecasts published by Bloomberg evaluate central bank interest rate expectations.
How Earnings and Rates Intersect
Higher interest rates increase the cost of borrowing for companies with variable-rate debt. This directly impacts their earnings. Technology and other growth-oriented industries are generally more sensitive to interest rate expectations than mature, cash-generating industries. This difference has led to significant divergences among sectors during the current earnings season. Personal income and consumer spending reports published by the Bureau of Economic Analysis evaluate quarterly GDP growth and retail expenditure trends.
