Earnings Season Looms

MACRO FRAME

US activity remains resilient enough to prevent a disinflationary narrative, while fiscal stress has become increasingly evident in euro-area dynamics.

STOCK INDEX FUTURES

Equity index futures are rebounding this morning, led by technology as oil prices fell and a Bloomberg report that OpenAI expects at least $70 billion in annualized revenue by year-end are helping ease concerns about AI monetization. The recovery follows Thursday’s technology-led selloff, when a Financial Times article, using cited documents, reported OpenAI’s annualized revenue was approximately $50 billion, below the $70 billion previously reported. That discrepancy renewed questions about whether revenue growth at large-language-model developers can justify rapidly expanding AI infrastructure investment. Today’s year-end revenue projection  story offers some reassurance, although it is not directly comparable with a reported current revenue run rate.

The next major test is third-quarter earnings season, which begins Tuesday with the large banks. Second-quarter earnings growth reached 33% y/y last quarter, an unusually strong pace outside recoveries from outright earnings declines. Deutsche Bank expects growth to remain near that rate at 34% in the third quarter, compared with consensus expectations of 27%, leaving room for another round of above-average earnings beats. The strength is extremely concentrated around beneficiaries of AI infrastructure spending, who currently account for more than half of S&P 500 earnings growth this quarter, alongside 116% growth in hyperscaler CAPEX. That helps explain why doubts about AI developers’ revenue can quickly spill over into semiconductor stocks and the broader index: the spending cycle supporting suppliers’ earnings ultimately depends on customers generating adequate returns on those investments. Impressive earnings growth has helped equities withstand higher yields, but continued resilience depends on companies sustaining that growth and validating elevated expectations.

Watch point: Despite tech volatility, the earnings backdrop suggests bullishness, despite the advent of a new hiking cycle.

CURRENCIES

US DOLLAR: The USD index held near 102.2 overnight. Recent gains have slowed as the index has come under increasing resistance around the 102.50 level, while its European peers have come under less selling pressure. President Trump’s comments ruling out an attack on Iran before the midterm elections, alongside reports of productive talks, have reduced some immediate geopolitical concern. Markets continue to assign an 80% probability to an October hold, but a December hike remains fully priced. Elevated bond yields and broad oil-price pressure remain supportive of the dollar, leaving downside risk susceptible to an immediate drop in oil prices.

Watch point: While current fiscal, macro, and geopolitical factors favor the dollar, it is beginning to enter overbought territory and could be susceptible to a modest correction.

EURO: The euro fell 0.12% to $1.1195. The euro is heading for a fifth consecutive weekly decline, although selling pressure has moderated as French bonds stabilize. France’s fiscal position and the difficult political path to deficit reduction remain important headwinds. Efforts to reduce a deficit of roughly 5.4% of GDP are being met with public resistance to spending restraint, while the comparatively resilient US economy continues to favor the dollar. Nevertheless, evidence of European economic resilience, including upgraded German growth forecasts, are a potential source of support for the euro at lower levels. While the increase in French yields has been dramatic, it does not reflect an emergency. The speed of the move likely resulted in leveraged investors being forced to unwind long OAT positions, which could have amplified the fundamental repricing. A move back to the 150 bps area could be difficult to reach. The 20-day rolling correlation between the French/German-10/yr. spread and euro is around -0.95, reflecting almost a perfect negative correlation and its highest correlation this year.

A Reuters poll showed that 90%  of economists surveyed expect the ECB to raise rates once more in December, after previously expecting the bank to be done with its tightening cycle. The ECB’s September meeting minutes showed that policymakers considered it vital not to signal any further policy move and keep all options on the table, though noted that inflation could turn out higher than expected.

Watch point: French sovereign stress will continue to be a dominant factor in price direction, however, the $1.10 level acts as a strong resistance level.

BRITISH POUND: Sterling fell 0.14% to $1.3207 but is on course for a second weekly gain against the euro. EUR/GBP is near 0.8474 after reaching 0.8449 on Wednesday, its lowest since June 2025. The pound’s relative strength therefore reflects the euro’s particular vulnerability to French fiscal concerns, rather than a broad-based advance against the dollar. Money markets are priced for 100 bps of tightening over the next twelve months and place an 86% chance of a hike next month. Globally, the focus is on the dollar and euro. The latest French episode favors sterling largely through relative euro weakness, not through a distinctly improved UK fundamental backdrop.

JAPANESE YEN: The yen slipped 0.27% to 158.30 yen per dollar. The currency remains under pressure from US rate differentials and a market that is unconvinced the central bank will raise rates in a timely manner. Policymaker Sato said in an interview that she supports the idea of raising interest rates in several stages, but the comments did little to move policy expectations. Mainly, the lack of conviction stems from the bank’s recent communications following its split decision to raise rates and the following summary of opinions, which provided little clarity on the timing of the next potential rate hike. However, the minutes did point to a board more favorable to raising rates once more. The greatest near-term upside risk for the currency remains market intervention. Markets are pricing roughly an 8% chance of a hike in October and see 19 bps of tightening by year-end.

Watch point: While markets are underwhelmed at the BOJ, a path for additional rate hikes looks to be  appears to be the primary scenario.

AUSTRALIAN DOLLAR: The Aussie gained 0.19% to $0.6969. Next Thursday’s Australian employment report is the key domestic catalyst. August’s unemployment rate rose to 4.6% despite a 39,500 increase in employment, as labor-force growth outpaced hiring. Further evidence of increasing slack would weaken the case for another RBA hike following September’s increase to 4.60%. Money markets price hike probabilities near 30% for November and 46% for December. The Australian 10-year yield is trading near a 10.5 bps premium to the US 10-year from around 40 bps in mid-September. That dynamic has recently pressured the currency and could continue to do so if the RBA holds rates for the foreseeable future, while the Fed raises rates. This will leave RBA policy expectations to play a large role in price direction.

Watch point: August’s hiring figures argue for a higher-for-longer stance, leading the focus to Q3’s inflation data.

TREASURY FUTURES

Yields edged higher overnight in relatively light trading. Inflation and growth data will remain central to the near-term policy outlook. St. Louis Fed President Alberto Musalem said further rate increases would be needed to bring inflation back to target, while declining to specify the appropriate decision at the upcoming meeting. This follows comments from Fed Governor Waller yesterday, who said that additional rate hikes will likely be needed to lower inflation to target, but noted there was “flexibility” about the pace of increases. Those comments were reflective of the tone of September’s  meeting minutes. Policymakers agreed that the labor market was near maximum employment and growth remained solid, reducing the need to protect against downside employment risks. The main policy question was therefore not September’s hike, but how much further to tighten: most expected another hike by year-end, although they differed over whether it was needed under their baseline outlook or primarily as insurance against upside inflation risks. Money markets assign an 80% chance of hold from the Fed rate come October, though remain fully priced for a hike by year-end, with further tightening expected in 2027. That pricing will continue to support yields despite recent Fed commentary that favored a hold come October following August’s softer PCE and labor-market data.

Watch point: Inflation risk, fiscal and corporate supply, capital competition and term premium will be key factors in determining whether the yield curve maintains its recent flattening or falls into a bear steeping move.

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