Next week promises to be a pivotal moment for the stock market, as a significant surge in third-quarter earnings reports from major companies is imminent. With approximately 20% of the S&P 500 slated to release their financial results, including heavyweights like Amazon and Tesla, investor attention will be keenly focused on these announcements. This comes at a time when the market is trading near all-time highs, prompting questions about whether current valuations are sustainable and what role earnings will play in shaping future market direction.
Key Takeaways: A Week of Crucial Earnings Reports
- Earnings season intensifies: Next week will see a massive influx of Q3 earnings reports, including crucial data from major players like Amazon and Tesla, setting the tone for the following week’s mega-cap releases.
- High valuations under scrutiny: The S&P 500 trades at a 40% premium to its long-term P/E Ratio, and tech stocks are even higher, indicating a need for robust earnings to justify current market enthusiasm.
- Lower expectations, higher potential for upside surprises: While Q3 earnings growth expectations are lower than previous quarters (4.1% projected), this presents an opportunity for companies to exceed forecasts, boosting investor confidence.
- Broadening market strength? Strong performances from companies beyond tech giants, like those in the small-cap Russell 2000 and healthcare sectors, suggest a potential widening of market strength.
- Macroeconomic lull: With a relatively quiet macroeconomic calendar, earnings will likely be the primary driver of market movement next week, preceding the upcoming US presidential election.
Earnings Season: A Defining Moment for Market Direction
The upcoming week marks a critical juncture in the current earnings season. While a smaller portion of S&P 500 companies reported their third-quarter results in the preceding week, the next seven days will witness a significant surge in announcements, accounting for roughly 20% of the index. The forthcoming reports will provide invaluable insights into the financial health of various sectors and overall market strength.
Analyzing the Current Market Landscape
The market’s current posture is one of optimism, reflected in six consecutive winning weeks for major indices––a trend not seen since December 2023 for the Dow and S&P 500, and July for the Nasdaq. However, this positivity exists against the backdrop of high valuations, a factor that introduces a layer of risk. Sam Stovall, chief investment strategist at CFRA Research, highlights the 40% premium of the S&P 500’s current P/E ratio compared to its long-term average, emphasizing the need for strong earnings to legitimize the prevailing market exuberance.
He notes that tech stocks are even more overvalued, trading at more than a 60% premium. This underscores the market’s reliance on superior-than-expected earnings growth to prevent a potential correction. The current bullish sentiment necessitates a confirmation from the underlying financial performance of listed corporations, illustrating the crucial role that earnings will play in determining the market’s future direction. “We need earnings to come in better than expected to help justify investor enthusiasm,” Stovall emphasizes.
Lower Expectations, Higher Potential for Upside
Despite the generally positive market sentiment, expectations for Q3 earnings growth have been revised downward. FactSet’s John Butters reports that the anticipated earnings growth for S&P 500 companies has decreased to 4.1%, down from 4.4% in September’s estimates. This figure is significantly lower than the double-digit growth observed in the previous quarter and the projected 12.5% growth for Q4. This downward revision, however, potentially sets a lower bar for success. Companies now have a greater chance of exceeding lowered expectations, thus providing a potentially more robust market reaction than a scenario where expectations were originally higher.
Positive Surprises: A Likely Scenario?
Despite the reduced estimates, there’s reason to believe that many companies will still surpass expectations. Historically, companies have often delivered positive surprises. Stovall highlights this trend: “If things have worked out pretty well in prior reporting periods…No reason why it’s not going to work out this time as well.” This cautious optimism suggests that while a decline in growth is anticipated, the potential for exceeding expectations remains significant. The combination of lowered expectations and the likelihood of positive surprises makes next week’s earnings particularly important.
Beyond the Tech Giants: A Broadening Market Trend?
While the reports from major tech companies like Amazon and Tesla will undoubtedly garner significant attention, investors must also consider the broader picture. The upcoming week will feature results from a wide array of companies across various sectors – including Lockheed Martin, GE Aerospace, International Business Machines, General Motors, Verizon Communications, United Parcel Services, and Southwest Airlines. Strong performances from these companies could signal a positive trend, suggesting a broadening of market strength that extends beyond the high-profile tech sector.
Signs of a Strengthening Market
Recent market indicators suggest that this broadening is already occurring. The small-cap Russell 2000 index demonstrated significant vigor this week, rallying almost 2%, exceeding the S&P 500’s 0.8% gain – a strong indicator of broader market health and interest. Similarly, the equal-weighted S&P 500 index outperformed its market-cap weighted counterpart, highlighting positive developments in sectors such as healthcare. Nelson Yu, head of equities at AllianceBernstein, echoes this sentiment, stating, “We think that actually what you saw in the third quarter was kind of a broadening out in terms of what was working, and we think that’s going to continue.” This optimistic view suggests the tech sector’s strength may be spreading to other areas of the economy.
The Week Ahead: Calendar of Events
Beyond the anticipated earnings reports, the upcoming week holds several other important economic events. While the macroeconomic calendar is relatively light, these announcements may still influence market sentiment. These events could add another layer of nuance to the market response to the coming earnings data. Careful consideration of the interplay of factors is crucial for comprehending the full scope of market behavior in the coming week.
Key events include:
- October 21st (Monday): Leading Indicators (September)
- October 22nd (Tuesday): Philadelphia Reserve Bank President Harker speaks
- October 23rd (Wednesday): Existing Home Sales (September), Fed Beige Book
- October 24th (Thursday): Building Permits (September), Chicago Fed National Activity Index (September), Continuing and Initial Jobless Claims, PMI Composite, S&P PMI Manufacturing & Services (October), New Home Sales (September), Kansas City Fed Manufacturing Index (October).
- October 25th (Friday): Durable Orders (September).
The convergence of these economic indicators and the substantial volume of anticipated earnings reports makes the upcoming week a critical period for stock market investors. The interplay between these factors promises to significantly influence market direction in the short-term, and set the stage for the remainder of the year’s financial activity.
