Holding stock records, with a golden hedge

A look at the day ahead in U.S. and global markets

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

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A relatively quiet start to the week for world markets leaves Wall Street pondering the sustainability of the recent record highs as corporate earnings updates pour in, the S&P500 index nears 6,000 and the election looms.

The peculiar sight of a risk-loving rally in U.S. equity markets and corporate high yield debt alongside new records for the traditional safe haven of gold may speak something of the hedged outlook, with geopolitical and electoral risks coloring the booming domestic economy.

And with neither candidate for the White House proposing any fiscal retrenchment ahead, trepidation about rising budget deficits during a period of such brisk growth is also adding investor anxiety.

A Wall Street sign hangs in front of a U.S. Flag outside the New York Stock Exchange (NYSE) in New York City, U.S., September 18, 2024. REUTERS/Andrew Kelly

The U.S. budget deficit grew 8% to $1.833 trillion for fiscal 2024, the highest outside of the COVID era, as interest on the federal debt exceeded $1 trillion for the first time, the Treasury said on Friday. The shortfall amounted to 6.4% of gross domestic product, up from 6.2% a year earlier.

A fiscal think-tank, the Committee for a Responsible Federal Budget, recently estimated that Republican Donald Trump's plans would pile up $7.5 trillion in new debt, more than twice the $3.5 trillion envisaged in Democrat Kamala Harris's proposals.

Shifting odds on post-election Congressional math, however, may have much to do with how any of those fiscal plans pan out.

At 4.12%, U.S. 10-year Treasury yields hovered close to 2-1/2 month highs on Monday even with another quarter-point Federal Reserve interest rate cut still near fully priced for next month.

With the Atlanta Fed's real-rime "GDPNow" model indicating growth in excess of 3.4% and U.S. economic surprise index at its most positive in six months, the early Q3 earnings season is impressing again with 83% of the 71 S&P500 firms reported  beating forecasts.

While the blended annual profit growth estimate for the 500 has dipped to 4% from the 5% expected pre-season, according to LSEG data, revenue growth is holding to expectations and a return to brisk double-digit earnings expansions is still forecast for next quarter and right through next year.

A heavy diary of updates this week spans industrial, defence, energy and financial sectors but Tesla's quarterly likely grabs many headlines mid-week.

Overseas, attention was back on China on Monday as the latest official lending rate cuts there were mostly expected and met with a shrug by markets. The one-year loan prime rate was lowered by 25 basis points to 3.10% from 3.35%, while the five-year LPR was cut by the same margin to 3.6% from 3.85% previously.