Stock market on comeback path to what should be another fantastic earnings season

A specialist trader works in a booth on the floor of the New York Stock Exchange (NYSE) in New York City, October 6, 2021.

Brendan McDermid | Reuters

Stocks proved hard to keep low this week, and the start of earnings season next week could further bolster the comeback if earnings come in as expected or better.

Major averages took a winning week after overcoming a debt ceiling debacle in Washington. Lawmakers approved a short-term deal that will extend the debt ceiling until December, putting that market overhang on hold.

This week’s price promotion also won rising oil prices and a disappointing job report, where investors buy banking and energy stocks.

“In light of the drama in Washington, concerns over the delta, multi-year highs in crude and a much weaker-than-expected job count, you should be impressed by how stocks have recovered this week,” said Ryan Detrick, chief strategist at LPL Financial. said.

A market slump that began in September at one point brought the S&P 500 down more than 5% from its record on Monday before stocks made a comeback. For the week, the S&P 500 added 0.8% and is just 3.4% off its record.

Goldman Sachs stuck to its bullish year-end forecast earlier this week and predicted that stocks would begin to climb the wall of worry. And they did.

Goldman chief US equity strategist David Kostin said in a note to customers that his year-end price target for the S&P 500 for 2021 is still 4,700, which is nearly 7% above current levels.

The company said earnings growth, not appreciation expansion, has been the main driver for the S&P 500’s 17% return to date, adding it should still be the case.

Earnings Season Begins

The third quarter earnings season, which kicks off next week with major banks’ profits, is expected to deliver another strong set of reports, despite some concerns about supply chain issues and higher costs. According to FactSet, third quarter earnings are expected to be up 27.6% year over year. That would be the third highest growth rate since 2010.

“We’ve seen record earnings seasons in recent quarters, so all eyes will be on whether earnings can help justify near all-time highs,” said Detrick. “We’re expecting another solid earnings season, but we’ve already seen some notable warnings, so corporate America could set a pretty high bar this quarter. Brace yourself.”

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Next week, banking results take center stage, with JPMorgan Chase, Bank of America, Morgan Stanley, Citigroup and Goldman Sachs.

After a string of tied months for banking stocks, analysts are looking ahead to catalysts that could fuel the next stage in their recovery. Wall Street Expected growth in loans, interest rates and release of reserves to play in the reports of the major banks.

“Third quarter earnings should once again be strong and broadly exceed expectations,” said Jim Paulsen, chief investment strategist for Leuthold Group. “Hours worked in the third quarter were up about 5%, suggesting that real GDP for the quarter may be close to 7%. As most companies report strong pricing power, a solid real GDP growth should result in another surprisingly strong corporate earnings season.”

Paulsen sees that the earnings season rewards cyclical stocks, such as banks, and small caps more than technology stocks.

“I think the stock market is already showing signs of a leadership shift away from slow economic growth favorites, including growth, technology and defensives, to more economically sensitive areas of small caps and cyclical sectors,” he added.

Supply chain, warnings of higher costs?

While the earnings season should be strong, there are likely some warning signs about inflation and supply constraints that could deter the market from year-end setup.

“The risks of higher inflation, the Fed winding down and what is likely to be a volatile earnings season are still there,” said Peter Boockvar, chief investment officer of Bleakley Advisory Group.

There was a harbinger of this last week, when Bed Bath and Beyond shares plunged 25% after the company said it saw a steep drop in traffic in August. Bed Bath & Beyond saw inflation costs escalate during the summer months, especially towards the end of the second quarter in August, affecting earnings.

What investors know going into the third quarter – based on company guidance – is that there could be haves and have nots this earnings season.

FactSet data shows that 47 S&P 500 companies issued negative third-quarter earnings expectations and 56 companies positive outlooks.

Fed headwind ahead?

The number of jobs in Friday’s paper was a major disappointment, as the economy added just 194,000 jobs in September, well below the Dow Jones estimate of 500,000. On the upside, unemployment fell to a much lower point than economists had predicted. At 4.8%, this is the same level as at the end of 2016.

It’s unclear if the number will change the calculation for when and how quickly the Federal Reserve will slow down its $120 billion-a-month bond-buying program.

“In our view, these numbers are good enough, and combined with the debt ceiling that could be stepped on, November is likely to solidify as ‘go time’ for winding down,” said Christopher Harvey, senior equity analyst for Wells Fargo Securities.

“We continue to expect a shaky stock market rally and a two to four week technical rebound, but the rebound is likely to dilute next month when the Fed says those magic words: we will start to wind down,” he added.

Week ahead calendar

Monday

(bond market closed)

Tuesday

06:00 NFIB Small Business Index

10:00 a.m. JOLTS Vacancies

Income: Fastenal

Wednesday

8:30 a.m. CPI

2 p.m. FOMC minutes

Income: JPMorgan Chase, BlackRock

Thursday

8:30 a.m. PPI

8:30 a.m. Weekly Unemployment Claims

Income: Bank of America, Morgan Stanley, Citigroup, Walgreens Boots Alliance, Wells Fargo, Domino’s Pizza, US Bancorp, UnitedHealth

Friday

8:30 Retail sales

10:00 a.m. University of Michigan Consumer Sentiment

Income: Goldman Sachs, JB Hunt, PNC Financial

— with reporting from CNBC’s Michael Bloom.

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