Investors Seek Earnings to Support Record-High Stock Prices, Reports Reuters

By Lewis Krauskopf

NEW YORK (Reuters) – Next week marks the beginning of a crucial corporate earnings season, with optimistic investors hoping that the upcoming results will validate the soaring valuations in a U.S. stock market close to record highs.

Recent labor market data has bolstered the argument for robust U.S. economic growth, with figures exceeding expectations. The stock market is up 20% year-to-date and remains near record highs, despite recent volatility due to rising geopolitical tensions in the Middle East.

As corporate earnings begin to be reported next week, the sustainability of the market rally faces a significant test. Companies must demonstrate solid profit growth and positive forecasts for the coming year to maintain the elevated valuations that have surged in recent months. Currently, the S&P 500 is trading at 21.5 times projected 12-month earnings, the highest level in three years, and well above its long-term average of 15.7.

"One of the few justifications bulls have for these high valuation multiples is continued strong earnings growth," stated Sameer Samana, a senior global market strategist at Wells Fargo Investment Institute. "With prices having increased, it’s crucial that earnings growth meets or exceeds expectations."

According to UBS equity strategists, S&P 500 earnings are projected to have increased by 4.7% in the third quarter compared to the same quarter last year. However, they expect an 8.5% growth rate when accounting for the historical pattern of positive earnings surprises.

Profit surpasses might be essential for further stock gains. Since 2010, the total return of the S&P 500 has closely mirrored the growth in company earnings and dividends. However, the index has outpaced expectations since early 2023 and is currently about 18% higher than forecasted levels, based on current earnings and dividends.

"The market seems somewhat overextended here," said Jack Ablin, chief investment officer at Cresset Capital. "It certainly anticipates strong earnings and dividend growth."

Additionally, data on U.S. consumer prices released next week will provide another perspective on the economy. A stronger-than-expected inflation report, following the robust jobs data, could further diminish expectations for future rate cuts by the Federal Reserve.

On Friday, futures tied to the federal funds rate indicated that the likelihood of a 50-basis point cut at the Fed’s upcoming meeting in November dropped to 5%, down from over 30% the day prior.

BANKS IN THE SPOTLIGHT

Next week’s earnings reports will prominently feature major financial institutions, including JP Morgan Chase, Wells Fargo, and BlackRock, scheduled for October 11.

Bank results provide critical insights into the economy, particularly concerning delinquency rates and loan demand, highlighted Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments. He will also be watching for evidence that the Fed’s recent 50-basis point cut is positively impacting the economy, seen through indicators such as increased auto sales and other major purchases.

Ideally, this momentum will persist even if expectations for additional rate cuts wane following the strong jobs report on Friday.

VanCronkhite remarked that after the initial rate cut, it is essential for leading demand indicators to show improvement, as "that would likely bolster confidence that we are moving toward a soft landing."