Stocks rise as earnings set to kick into high gear

Stocks hit fresh all-time highs as investors looked ahead to Corporate America for further vindication of soft-landing bets.

Without much in the way of economic data this week, earnings reports are poised to drive Wall Street sentiment. The S&P 500 rose almost 1%, notching another record - its 46th this year. That’s a hint investors are not deterred by the reduced forecasts for third-quarter results, and are instead betting this reporting season will once again deliver positive surprises.

Strategists are predicting S&P 500 firms will post their weakest results in the past four quarters, with just a 4.3% increase compared with a year ago, Bloomberg Intelligence data show. Meantime, corporate guidance implies a jump of about 16%. That solid outlook suggests companies could easily beat market expectations.

“Wall Street has underestimated Corporate America lately,” said Callie Cox at Ritholtz Wealth Management. “This environment is tough to get a read on, and I don’t blame anybody who’s approaching this rally with a bit of skepticism. We still think the biggest – and most expensive – risk here is to miss a rebound and an eventual rally higher.”

The S&P 500 hovered near 5,860 amid thin trading volume. The Nasdaq 100 added 0.8%. The Dow Jones Industrial Average climbed 0.5%. Nvidia Corp. led gains in megacaps, Apple Inc. gained on a bullish analyst call and Tesla Inc. rebounded after last week’s plunge. Goldman Sachs Group Inc. and Citigroup Inc. advanced ahead of results.

Treasury futures were marginally lower while cash trading was closed for a US holiday. The dollar edged up. Bitcoin jumped 5%. Oil declined after China’s highly anticipated Finance Ministry briefing on Saturday lacked specific new incentives to boost consumption in the world’s biggest crude importer.

Earnings season unofficially kicked off on Friday, led by financial bellwethers JPMorgan Chase & Co. and Wells Fargo & Co. On top of other big banks reporting this week, traders will be paying close attention to results from key companies like Netflix Inc. and JB Hunt Transport Services Inc.

An initial round of third-quarter financial results last week showed Corporate America is benefitting from lower rates early into the Federal Reserve’s easing cycle, according to Bank of America Corp. strategists.

Easing rates pressure was seen in a surge in debt underwriting, mortgage applications and refinancing activity, as well as signs of a bottom in manufacturing, the BofA team including Ohsung Kwon and Savita Subramanian said.

To Solita Marcelli at UBS Global Wealth Management, third-quarter results should confirm that large-cap corporate profit growth is solid against a resilient macro backdrop.

“We maintain our positive outlook for US equities, supported by healthy economic and profit growth, the Fed’s easing cycle, and AI’s growth story,” she said. “While valuations are high, we think they are reasonable against the favorable backdrop.”

Marcelli reiterated her S&P 500 price target of 6,200 by June 2025, and continues to like “AI beneficiaries and quality stocks.”

An improving trend in US macro data should continue to offer support for stocks tied to economic momentum, according to Morgan Stanley strategist Mike Wilson.

“Further stabilization in the economic surprise index should support quality cyclicals even if it comes amid higher yields,” Wilson and his team wrote in a note.

Better US data and supportive policy have helped lower downside risks near-term, according to Goldman Sachs Group Inc. strategists led by Christian Mueller-Glissmann. They shifted to overweight equities and underweight credit for the next three months.

The strategists noted equities can deliver attractive returns driven by earnings growth and valuation expansion in late-cycle backdrops, while credit total returns are usually constrained by tight credit spreads and rising yields.

While they think the risk of a bear market remains relatively low, the analysts see potential for volatility due to geopolitical shocks, US elections, and less favorable growth/inflation mix.

“Last week, the S&P 500 index surpassed our year-end price objective of 5,800,” said Craig Johnson at Piper Sandler. “We are leaving it unchanged for now but realize some ‘fine-tuning’ is needed as we expect equities to continue trending higher after the US presidential election.”

Despite the above-average gain in the first two years of this bull market, history says that investors need to be prepared for a possible setback in the coming 12 months, according to Sam Stovall at CFRA.

The average return following the 11 bull markets that celebrated their second anniversary was 2% (5.2% excluding those that became bear markets before the third year was out, Stovall noted. What’s more, all experienced a decline of 5%, while five endured selloffs in excess of 10% but less than 20%, and three succumbed to new bear markets. Despite this unsettling intra-year volatility, three bulls posted double-digit gains.

While bull markets that have made it this long have tended to go on a lot longer before they finally experience a 20% drop, that doesn’t mean there haven’t been hiccups along the way, according to Bespoke Investment Group.

Overall, the S&P has seen weaker-than-average returns in year three of bull markets, the firm said. The index has averaged a gain of just 3.7% in the 12 months following day 503 of past bull markets - with positive returns just 55% of the time. That compares to an average gain of 9.26% across all rolling 12-month periods for the market.

“What we’d note, however, is that of the 11 bull markets shown, only two of them came to an end at some point during the 12-month window following day 503, so this period between years two and three of long-lasting bulls has been more of a consolidation phase rather than an endpoint,” Bespoke concluded.