Earnings next week will play a crucial role in determining the direction of the stock market. A significant number of companies are set to report their third-quarter results in the coming days, with approximately 20% of the S&P 500 index expected to release their earnings. Some of the notable names include Amazon and Tesla, which will set the stage for a wave of mega-cap results due in the following week. With the macroeconomic calendar relatively quiet and the upcoming U.S. presidential election creating anticipation, earnings reports will be the primary driver for stocks, which are currently trading near record highs. According to Sam Stovall, chief investment strategist at CFRA Research, valuations are stretched, with the S&P 500 trading at a 40% premium to its long-term P/E ratio and tech stocks trading at over 60%. Stovall emphasized the need for earnings to exceed expectations to justify investor optimism. Wall Street has recently shown a strong risk-on sentiment, with the major averages registering their sixth consecutive week of gains. This streak is significant for both the Dow Jones Industrial Average and the S&P 500, marking their first such streak since December 2023. For the Nasdaq Composite, it is the first streak since July.
Earnings growth expectations for the current season are already lower than previous estimates. While this could lead to a negative impact on investor sentiment if companies fail to meet expectations, it also provides an opportunity for companies to surpass forecasts. John Butters from FactSet noted that S&P 500 companies are expected to report earnings growth of 4.1% in the third quarter, slightly below previous estimates. However, given the track record of positive surprises, Butters anticipates earnings growth to exceed 7% for the quarter. The upcoming earnings reports from companies like Amazon and Tesla will set the tone for the broader market, with Amazon potentially influencing the consumer discretionary sector. Additionally, a range of industries, including aerospace, defense, and technology, will release their earnings reports, providing further insight into the health of the economy.
Next week’s earnings reports could potentially confirm the signs of market broadening that have been observed recently. While sectors like semiconductors have performed well, the small-cap Russell 2000 index has outperformed the S&P 500 this week, indicating a broader market rally. Companies like General Motors, Verizon, and Southwest Airlines are among those set to report their earnings, offering a diverse view of the economic landscape. Overall, the market is showing signs of resilience and potential growth, with analysts optimistic about the future performance of various sectors.
The upcoming week also features a light macroeconomic calendar, with a focus on key indicators such as leading indicators, existing home sales, and new home sales. Federal Reserve speeches and reports on manufacturing activity will also provide insights into the state of the economy. Overall, the week ahead is expected to be driven by earnings reports, which will play a crucial role in determining the trajectory of the stock market in the coming weeks.