Weekly Snapshot October 26, 2020

US stocks fell 0.5% last week to 3465, breaking a 3-week winning streak.1 While Q3 earnings continue to come in better-than-expected overall with a near-record 83% of companies beating analysts estimates, shortfalls have been met with large selloffs.3 Last week’s declines included Intel, which fell 11.0%, UnionPacific (-10.3%) Netflix (-8.0%), IBM (-8.0%) PulteGroup (-7.9%) and American Express (-4.0%).2 Investors remain focused on negotiations of additional fiscal stimulus, the upcoming elections (where investors now view a potential Democratic sweep as the most likely outcome), and the worsening Covid-19 figures where on Friday, a record 85k new cases were reported, surpassing the previous high seen on July 16th.1 While full lockdowns are not expected at this point, there are growing signs of rollbacks, including news that Boston city schools have pivoted back to virtual classrooms and that Disney won’t reopen its California theme park due to capacity restrictions implemented in that state. However, we believe the most important factor impacting stocks is the recent rise in interest rates. 10-year Treasury Bond yields jumped 10bps last week, ending at 0.84%, the highest since early June, and with little to no movement on short-term rates (anchored by Fed intentions to keep rates near zero for sometime), yield curves have quickly steepened.3 The spread between the two and ten-year Treasury notes reached 70bps, the most since 2018.3 Most view this positively, as it can be seen as a sign of a more healthy economy. Steeper yield curves are also seen as supportive to the struggling banking sector, especially those more dependent on lending and spread business. Regional banks KeyCorp (+4.0%) and PNC Financial (+3.0) are examples of banks that have been crushed for most of 2020, but have bounced on the heels of the steepening yield curve. We would remind investors to “be careful what you wish for,” as higher long-term rates could also be a signal of building inflationary pressures. At some point, higher long-rates will also be detrimental in the valuation of the longer-duration equities, AKA as “growth stocks,” this year’s market leaders. Finally, building inflation pressures could also cause the Federal Reserve to change its stance on monetary conditions, which we view as the largest contributor to the market’s rally from the March lows.


  • Intel Corporation (INTC) – INTC fell 11% last week after reporting Q3 earnings which were pressured by falling margins, manufacturing problems and continued market share losses to AMD. This is the second consecutive quarter where INTC shares plummeted following the report, leaving the stock down 20% for the year. While INTC is a cheap stock selling at 10x forward earnings with nearly a 3% dividend yield, the stock is likely to remain pressured until these concerns lift, which we expect will take several quarters.

  • Netflix (NFLX) – Although NFLX is still up 50% in 2020, the stock fell 8% last week after reporting Q3 earnings where subscriber growth badly missed expectations at 2.2 net additions, following two quarters where over 10m subscribers were added. Netflix is now guiding to positive free cash flow and is still a thriving company and a long-term winner in streaming, but trading at nearly 60x NTM EPS, any shortfall is likely to be met with a selloff.

  • Union Pacific (UNP) – UNP’s Q3 results were a reminder that while the economy is improving (volumes for UNP improved 12% over Q2 results), it remains far below pre-pandemic levels. This western rail reported an 11% drop in sales on a 12% decline in “bulk shipments” and an 18% decline in Industrial Products in the third quarter.


  • Q3 Earnings Reports3 – Analysts expect Q3 earnings for S&P 500 companies to decline 16%, which would represent the 2nd worst quarterly result since the Great Recession in 2009. This would also represent the 6th consecutive quarter of negative earnings comparisons, a period that extends beyond the beginning of the pandemic. Though conditions remain difficult, especially for service-related companies that depend on travel, gatherings, and entertainment, this is far better than Q2’s 35% decline and up from expectations of a 25% decline on June 30th. Investors seem content with directional improvements and evidence that the worst-case possibility isn’t occurring. While only 15% of S&P 500 companies have posted Q3 earnings thus far, 86% of those have beaten EPS expectations by a whopping 22%, not unlike the record level of positive earnings surprises seen in Q2. This week’s lineup of companies due to report includes bellwethers Microsoft, Pfizer, UPS, Apple, Amazon, Visa, Chevron and ExxonMobil.

    As always, we appreciate your confidence in our team.

Fundamentum Investment Committee
Chad Roope, CFA® Portfolio Manager
Paul Danes, CFA® – Investment Committee
Trevor Forbes – Investment Committee
Matt Dunn, CFA® – OSJ Supervisor


  1. Wall Street Journal, 10/26/20
  2. Morningstar Direct, 10/26/20
  3. FactSet, 10/26/20

    Investment advice offered through Fundamentum LLC a registered investment advisor. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the investment objective of any investment strategy will be attained. Investing involves risk including loss of principal. Past performance is no guarantee of future performance. All indices are unmanaged and may not be invested into directly.