3 Market Drivers Entering the 4th Quarter

September 9, 2022

By Tim Courtney, Chief Investment Officer


As we approach the end of the third quarter, taking a look at the factors driving markets, or at least should be driving the markets, is encouraged. These include changing interest rates, the U.S. dollar and earnings. Below, we examine each as well as the global and domestic ramifications.

Interest rates. Interest rates are top of mind for many investors and have become the dominant force in determining market prices. When the market sees a news story, it isn’t concerned so much about the immediate, direct influence on markets, but rather on how the news will impact interest rates. This obviously affects bonds but also stocks with a majority of their value tied to earnings decades in the future.

Following several significant rate hikes already this year, U.S. Federal Reserve officials recently reiterated their support for further increases.1 The chief of the New York Fed indicated the central bank will likely need to take its policy rate “somewhat above” 3.5% and keep it there through the end of 2023.1 Interest rates will continue to move markets likely for several more quarters.

U.S. dollar. The United States has been more aggressive in raising interest rates to tame inflation than other counties. Because our rates are moving higher more quickly, we’re seeing the demand for dollars climb rapidly. Late last month, the Dollar Index reached 109.44 points, its best level in nearly two decades.2 As such, more and more foreign investors are eyeing U.S.-based assets because of higher interest payments. It does feel strange to be in a period where the currency is appreciating rapidly but inflation is still very high.

Additionally, much emerging-market debt is denominated in U.S. currency, meaning dollars must be used to pay back the principal and interest. At the same time, however, emerging markets are continuing to eat away at their dollar reserves3 and will need find a way to get more, which should keep dollar demand high. The dollar’s strength right now is affecting investors in many ways, including the returns generated by international assets as well as cheaper imports and foreign travel.

Earnings. With interest rates drawing so much attention, markets have paid much less attention to earnings. But ultimately, earnings are the reason that we invest in the market. Of the S&P 500 companies that have reported Q2 earnings, 369 beat expectations, 23 met them and only 100 missed.4 While this is positive on the surface, the reality is that estimates have been trending lower. Second-quarter earnings compared to last year’s second quarter show slight gains to slight losses depending on the type of earnings considered.5 Growth so far in 2022 has been nominally positive, but negative when adjusted for inflation in the 8%-9% range.6

Earnings appear to face some challenges as the third quarter ends. Given last year’s growth, the pressure we are seeing on earnings is not completely surprising. We could see earnings for the year turn out to essentially match where they stood at the end of 2021, and this is our base case. Considering the challenges we are facing, that outcome wouldn’t be the worst thing to happen for markets. If you have any questions, please feel free to contact your Exencial advisor.




  1. Reuters (8/30/22) — Fed officials see U.S. interest rates rising further
  2. Forbes (8/29/22) — U.S. dollar hits 20-year high: Here’s what that means
  3. The Wall Street Journal (8/24/22) — Emerging markets burn through currency reserves as crisis risks grow
  4. FactSet (8/8/22) – Market not punishing negative EPS surprises reported by S&P 500 companies for Q2
  5. S&P Global (8/30/2022) – S&P 500 Index 2022 earnings estimate
  6. U.S. Inflation Calculator (8/31/22) — Current US inflation rates: 2000-2022


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The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies. It tracks the price of the US dollar against six foreign currencies, aiming to give an indication of the value of USD in global markets.

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