Markets Brief: Q3 Earnings Season Kicks Off

Insights into key market performance and economic trends from Dan Kemp, Morningstar’s global chief research and investment officer.

Banks Back in Favor, JP Morgan Now Overvalued

Banks were the big winners over the week, rising 4.7%, as JPMorgan Chase JPM and Wells Fargo WFC started the third-quarter earnings season. Morningstar analysts believe that on average, financial services companies are now priced above their fair value, so expecting below-average returns is reasonable. JPMorgan’s results were especially influential since it’s the biggest bank in the sector (making up 34% of the Morningstar US Bank Index). Analyst Suryansh Sharma believes the stock is now materially overvalued.

This represents a sharp reversal from 2022, when banks were deeply unpopular and materially undervalued. It’s an important reminder of sentiment’s role in short-term price changes. While stocks’ fair values change over time, prices typically move more dramatically in response to headlines with little impact on real values. The difference between these sentiment-driven prices and a company’s long-term prospects creates opportunities for investors to secure above-market returns. While prices fluctuate constantly, they only occasionally become sufficiently disconnected from fair value to create attractive investment opportunities—generally when we feel the most pressure to follow the herd. This is one of the key reasons many investors find it difficult to achieve higher-than-average returns.

Banks will continue reporting after Columbus Day, with Bank of America BAC and Citigroup C among a raft of companies announcing their results on Tuesday. You can track the earnings season calendar and read what Morningstar equity analysts make of the results.

Fee Pressure on Asset Managers

BlackRock BLK also cheered investors, as its assets under management passed $11.4 trillion. Notably, fees grew more slowly than assets, due to a shift to lower-cost products and fee reductions. While lower fees are generally good news for investors, they are also a reminder of the headwinds facing smaller asset managers and the importance of understanding the quality of the parent company when selecting an investment strategy. Consequently, parent ratings constitute an integral part of Morningstar’s analysis.

Tesla Still Overvalued

Tesla’s TSLA stock slumped at the end of the week, as the first look at its much-anticipated robotaxi vehicles disappointed investors who hope autonomous driving will be its next source of significant revenue growth. While this is not the first time a Tesla launch has gone poorly, the stock fell 9% in response. Seth Goldstein believes the company remains overvalued and has maintained its fair value estimate at $200 per share. Additionally, Morningstar insurance analysts recently published a report on autonomous driving’s implications for insurance companies.

China Offers Opportunities

The Morningstar US Index rose 1.2% last week, while other developed markets were down 0.5% and emerging markets were down 1.4%. While a rise in the US dollar contributed to this outcome, the main culprit in emerging markets was China, which fell 6.6% but remains up 28.5% over the last month after the country’s September stimulus. Despite this sharp price rise, Morningstar’s investment management team continues to see opportunities in China, driven by attractive valuations and the quality of its large technology-led businesses.

Investors Expect a November Rate Cut

The probability of an interest rate cut of 25 basis points happening at November’s Federal Reserve meeting increased slightly at the end of last week, despite September core inflation coming in a little higher than expected (0.3% vs. projections of 0.2%). This indicates strong investor conviction in the near-term path of interest rates, which may be challenged by a raft of economic data this week. Such news is unlikely to be important for investors who take a longer-term view. You can keep track of these releases with our market calendar.

Highlights of This Week’s Market and Investing Events

• Tuesday, Oct. 15: Earnings from Bank of America BAC, Johnson & Johnson JNJ, UnitedHealth Group UNH, PNC Financial Services PNC, Citigroup C, Charles Schwab SCHW
• Wednesday, Oct. 16: Earnings from US Bancorp USB, United Airlines UAL, Kinder Morgan KMI
• Thursday, Oct. 17: Initial Unemployment Insurance Claims report, Federal Reserve Bank of Philadelphia Index, Retail Sales, Capacity Utilization, Industrial Production, Business Inventories, earnings from M&T Bank MTB, Truist Financial TFC, Huntington Bancshares HBAN, KeyCorp KEY, Netflix NFLX, Taiwan Semiconductor TSM
• Friday, Oct. 18: New Residential Construction report, earnings from Comerica CMA, Procter & Gamble PG, Fifth Third Bancorp FITB, Regions Financial RF

Check out our full weekly calendar of economic reports, consensus forecasts, and corporate earnings.

For the Trading Week Ended Oct. 11

• The Morningstar US Market Index rose 1.18%.
• The best-performing sectors were technology, up 2.73%, and financial services, up 1.85%.
• The worst-performing sector was utilities, down 2.27%.
• The yield on 10-year US Treasury notes rose to 4.08% from 3.98%.
• West Texas Intermediate crude prices rose 0.95% to $75.64 per barrel.
• Of the 703 US-listed companies covered by Morningstar, 422, or 60%, were up, five were unchanged, and 281, or 40%, were down.

What Stocks Are Up?

Arcadium Lithium ALTM, Uber Technologies UBER, Norwegian Cruise Line Holdings NCLH, Zscaler ZS, Carnival CCL

Best-Performing Stocks of the Week

What Stocks Are Down?

Tesla TSLA, Tandem Diabetes Care TNDM, Vistra VST, Myriad Genetics MYGN, Lumen Technologies LUMN

Worst-Performing Stocks of the Week