U.S. Stock Market Hits New Highs Amid Earnings Season: What to Expect

Top 5 Points from the Article

1. S&P 500 and Dow Jones Reach Record Highs: The S&P 500 hits another all-time high, and the Dow closes above 43,000 points for the first time.
2. Earnings Season Fuels Market Optimism: Strong earnings reports from major companies are propelling stock market growth.
3. Concerns Remain Despite Market Gains: Investors remain cautious due to rising Treasury yields, Federal Reserve policy uncertainty, and geopolitical risks.
4. No Landing Scenario in Focus: Bank of America Securities suggests a "no landing" scenario, where the economy continues expanding despite inflation, could bolster stocks further.
5. Election Uncertainty Lingers: The upcoming U.S. presidential election is adding a layer of anxiety to an otherwise bullish market outlook.

S&P 500 and Dow Jones Surge to Record Highs

Key Milestones in the Stock Market Rally

On Monday, the S&P 500 rose by 0.8%, while the Dow Jones Industrial Average climbed 0.5%, closing above the 43,000-point mark for the first time in its history. The Nasdaq Composite, driven by gains in the tech sector, advanced 0.9%. This rally marks a continuation of the market’s strong performance in 2024, with the S&P 500 now up almost 23% for the year, excluding reinvested dividends.

The surge in the S&P 500 and Dow has been fueled by investor optimism surrounding corporate earnings, with several major companies set to report results this week. Notably, Bank of America, Goldman Sachs, and Johnson & Johnson are among the key players scheduled to release earnings reports, following strong performances from JPMorgan Chase and Wells Fargo, which kicked off the third-quarter earnings season.

Tech Sector Leads the Way

Technology stocks have been the best performers in the S&P 500, continuing their upward trajectory as investors remain bullish on the sector's growth potential. Major tech companies like Apple, Microsoft, and Nvidia have seen strong gains this year, with investors betting on continued innovation and expansion in areas like artificial intelligence and cloud computing.

Corporate Earnings Drive Market Optimism

Strong Start to the Earnings Season

The third-quarter earnings season has started on a high note, with several companies exceeding analysts' expectations. According to Bank of America, 30 companies in the S&P 500 have already reported earnings, beating consensus estimates by an average of 5%. This is an improvement over last quarter’s 3% average beat rate at this time.

Earnings reports from major banks like JPMorgan Chase and Wells Fargo have contributed to the positive momentum, with early signs of a recovery in banking profits helping push the broader market to new highs. Investors are now looking forward to upcoming earnings reports from companies such as Netflix, Procter & Gamble, and Walgreens Boots Alliance.

Earnings Growth Expectations

Despite the market's strong performance, analysts at Bernstein caution that this quarter’s earnings-per-share growth rate is likely to be lower than last quarter’s. However, Oppenheimer believes the market could continue its upward trajectory, buoyed by strong corporate earnings and overall economic resilience.

Concerns Amid the Bull Market

Rising Treasury Yields and Federal Reserve Policy Uncertainty

While the stock market is reaching new highs, rising Treasury yields and uncertainty about Federal Reserve policy are causing some anxiety among investors. Last week, the yield on the 10-year Treasury note topped 4.1%, raising concerns about the potential impact on borrowing costs for businesses and consumers alike. Higher Treasury yields typically lead to higher interest rates on everything from mortgages to auto loans, which could dampen consumer spending and economic growth.

The Federal Reserve's next steps are also in focus, as investors await signals about the pace of future rate cuts. While the Fed initiated its easing cycle with a larger rate cut in September, there is still uncertainty about how quickly the central bank will continue reducing rates in the coming months. Some analysts believe the Fed’s next move will be a 25-basis-point cut in November, but much will depend on upcoming economic data.

Geopolitical Risks Add to Investor Anxiety

In addition to concerns about Treasury yields and Fed policy, investors are also keeping a close eye on geopolitical risks, particularly in the Middle East. Rising tensions in the region have the potential to impact global markets, especially in sectors like energy and defense.

No Landing Scenario: A Bullish Outlook for Stocks

Bank of America’s "No Landing" Scenario

According to Bank of America Securities, the September retail sales report could strengthen the “no landing” narrative, where the economy continues to expand despite elevated inflation. This scenario, in which the U.S. economy avoids both recession and economic slowdown, is seen as bullish for stocks. Bank of America’s equity and quant strategist Ohsung Kwon believes that strong retail sales data could further bolster confidence in this outcome.

The "no landing" scenario suggests that as long as inflation remains contained, the relationship between interest rates and stock prices will remain positive. This could mean continued upward momentum for the stock market, especially if corporate earnings remain strong.

Election Uncertainty and Its Impact on the Market

Presidential Election Adds Volatility

Despite the market's record highs, the upcoming U.S. presidential election is adding a layer of uncertainty. With just a few weeks remaining before the election, investors are closely watching how political developments could impact market sentiment. Historically, election years are accompanied by increased volatility as investors weigh the potential impact of policy changes on the economy and business environment.

Oppenheimer’s chief investment strategist John Stoltzfus noted that, while election-year nervousness is natural, economic conditions, corporate earnings, and monetary policy tend to carry more weight in shaping market direction than political arguments. Still, investors should be prepared for potential volatility in the final weeks leading up to the election.

Impacts on the Forex Market and Global Economy

Strengthening of the U.S. Dollar

The recent stock market rally has also had implications for the global forex market, particularly with the U.S. dollar. As the U.S. economy shows resilience and the stock market climbs to new heights, the dollar has strengthened against other currencies. This could affect international trade, making U.S. goods more expensive for foreign buyers while making imports cheaper for U.S. consumers.

The rise of the U.S. dollar may also impact emerging markets, many of which rely on dollar-denominated debt. As the dollar strengthens, these countries may face increased pressure on their currencies and economies.

The U.S. stock market's rise to record highs reflects strong corporate earnings, positive market sentiment, and resilience in the face of economic uncertainties. While concerns about rising Treasury yields, Federal Reserve policy, and geopolitical risks persist, the outlook remains generally positive, especially with the potential for a “no landing” scenario. As investors navigate the final weeks before the U.S. presidential election, market volatility is expected to rise. However, the fundamentals—corporate earnings, economic conditions, and monetary policy—will continue to play a more significant role in shaping the market's direction.

References

Han, L. K., & Li, Y. (2024, October 13). Dow adds 200 points for first close above 43,000; S&P 500 hits another all-time high: Live updates. CNBC.