Will a projected 30% profit growth for the S&P 500 and optimistic tech sector guidance be enough to fuel the ongoing stock market rally? Investors will soon find out as the third-quarter earnings season commences.
Big banks, including JPMorgan Chase, Goldman Sachs, Citigroup, and Wells Fargo, are set to report, offering insights into the impact of higher interest rates on loan growth, balance sheets, and M&A activity. JPMorgan's results and CEO Jamie Dimon's outlook will be particularly closely watched.
The tech sector is expected to contribute significantly, with analysts forecasting a 65% increase in profits, a rise from the previous estimate of 57%. Companies like Nvidia, Micron Technology, and Dell Technologies are expected to lead this growth. Encouragingly, profit growth appears to be broadening beyond the dominant 'Mag 7' stocks, with other S&P 500 companies projected to achieve 27% year-over-year gains. MidCap operating earnings for the S&P 400 are also anticipated to rise by 19%.
However, challenges remain. The financial sector is trading near its 200-day moving average, and rising interest rates may begin to affect loan growth and fixed-income securities. Volatility is expected as investors scrutinize the banks' earnings and guidance.
Strategists from Goldman Sachs have shifted to an 'overweight' stance on equities, citing a supportive macroeconomic climate with low recession risk and an expectation of easing inflation. They recommend a strategy focusing on AI beneficiaries and select rate-sensitive, high-dividend, and low-volatility stocks.
Morgan Stanley Wealth Management notes that stock multiples have decreased, trading at 19 times forward earnings compared to 21 times over the summer, despite increased earnings growth. They also highlight that key growth drivers like AI capital expenditures and wealth-linked consumption have remained resilient to higher rates.
UBS is also optimistic, forecasting the S&P 500 to reach 8,400 by June of the following year.
The tech sector, representing 40% of the S&P 500 and a significant portion of its estimated profits, will be critical. Investors will seek indicators of sustained AI chip and infrastructure demand amidst a challenging macroeconomic environment. Taiwan Semiconductor Manufacturing Company's (TSM) upcoming report will be a key test for chip demand trends.
Despite the optimism, underlying market breadth remains a concern, with a significant percentage of S&P 500 stocks trading 20% or more below their 52-week highs. Earnings revisions have turned negative in several sectors, including materials, consumer staples, and health care. Bank of America suggests that strong earnings beats, while expected, may not be sufficient to propel stocks higher, especially with valuation metrics appearing stretched on numerous measures.
Furthermore, the interplay of geopolitics, interest rates, and technology could introduce volatility. Bank of America warns that a higher cost of capital and geopolitical bottlenecks might disrupt the current market narrative.
