Earnings in the upcoming week will be pivotal in determining the direction of the stock market. A substantial increase in the number of companies reporting their third-quarter results is expected in the coming days. While approximately 10% of S&P 500 companies presented their results over the past week, around 20% of the index plans to do so in the next week. Notable among these are Amazon and Tesla, whose reports will precede a significant lineup of major tech companies scheduled for the following week.
With the macroeconomic calendar indicating a lack of major catalysts and an overall lull anticipated ahead of the upcoming U.S. presidential election, earnings results are expected to be the primary driver for stocks, which are trading near record highs, to potentially move higher. According to Sam Stovall, chief investment strategist at CFRA Research, current valuations are elevated, with the S&P 500 trading at a 40% premium to its long-term price-to-earnings ratio, and tech stocks trading at a premium of over 60%. Stovall commented that earnings need to exceed expectations to justify current investor enthusiasm.
Recently, Wall Street has exhibited a strong risk-on sentiment, with major averages marking their sixth consecutive winning week on Friday. For the Dow Jones Industrial Average and S&P 500, this is the first such streak since December 2023, while for the Nasdaq Composite, it is the first since July.
Expectations for earnings growth this season are currently lower. While this reduces the threshold for disappointments that might affect investor sentiment and potentially lead to a re-evaluation of equity gains, it also provides companies with a better opportunity to surpass expectations. John Butters from FactSet noted that S&P 500 companies are expected to report third-quarter earnings growth of just 4.1%, down from a 4.4% estimate in September and weaker than the double-digit growth seen in the previous season, as well as below the 12.5% growth predicted for the fourth quarter. However, Butters pointed out that S&P 500 earnings growth is likely to exceed 7% for the third quarter due to companies’ consistent positive surprises.
Upcoming reports from Amazon, scheduled for Thursday, and Tesla, set for Wednesday, are expected to provide early insights before a significant week for large-cap tech companies. Amazon, in particular, could indicate trends for the broader consumer discretionary sector. Reports from various industries, including aerospace and defense firms like Lockheed Martin and GE Aerospace, and blue-chip companies like International Business Machines, are expected. Other companies such as General Motors, Verizon Communications, United Parcel Service, and Southwest Airlines are also due to report. Continued positive surprises in earnings could reinforce the market’s recent broadening, despite the strong performance of companies like Nvidia and other semiconductor firms. The small-cap Russell 2000 has rallied nearly 2% this week, outperforming the S&P 500’s 0.8% gain. Meanwhile, the equal-weighted S&P 500 has slightly outpaced the market-cap weighted benchmark this week, a promising sign for sectors like healthcare.
Nelson Yu, head of equities at AllianceBernstein, stated that the third quarter showed a broadening of successful areas, and anticipates this trend will continue.
The economic calendar for the upcoming week includes:
– Monday, October 21: 10 a.m. – Leading Indicators (September)
– Tuesday, October 22: 10 a.m. – Philadelphia Reserve Bank President Harker speaks in Philadelphia
– Wednesday, October 23: 10 a.m. – Existing Home Sales (September), 10 a.m. – Fed Beige Book
– Thursday, October 24: 8 a.m. – Building Permits final (September), 8:30 a.m. – Chicago Fed National Activity Index (September), 8:30 a.m. – Continuing Jobless Claims (10/12), 8:30 a.m. – Initial Claims (10/19), 9:45 a.m. – PMI Composite preliminary (October), 9:45 a.m. – S&P PMI Manufacturing preliminary (October), 9:45 a.m. – S&P PMI Services preliminary (October), 10 a.m. – New Home Sales (September), 11 a.m. – Kansas City Fed Manufacturing Index (October)
– Friday, October 25: 8:30 a.m. – Durable Orders preliminary (September)
