A specialist trader works inside 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 down this week and next week’s earnings reporting season start could further bolster the comeback if profits roll in as expected or better.
The major averages are heading for a winning week after overcoming a debt ceiling debacle in Washington. Ultimately, lawmakers passed a short-term deal that will extend the debt ceiling until December, kicking that overhang for the market down the road.
Add surging oil prices and a disappointing jobs report to the list of other big worries overcome by this week’s price action, with investor buying up bank and energy shares.
“In the face of Washington drama, delta worries, multi-year highs in crude oil, and a much weaker than expected jobs number, you have to be impressed by how stocks were able to bounce back this week,” said Ryan Detrick, chief market strategist at LPL Financial.
A market pullback that began in September brought the S&P 500 down more than 5% from its record at one point on Monday, before stocks mounted a comeback. For the week, the S&P 500 added back about 1% and sits just 3% away from its record.
Goldman Sachs early this week stuck by its bullish year-end forecast, predicting stocks would start to climb the wall of worries. And they did.
Goldman’s chief U.S. equity strategist David Kostin said in a note to clients that his year-end S&P 500 price target for 2021 is still 4,700, which is nearly 7% above its current level.
Goldman said earnings growth, not valuation expansion, was the primary driver of the 17% S&P 500 equity return year-to-date and that should continue to be the case.
Earnings season begins
Earnings season — which kicks off next week with big bank earnings — is expected to be another strong series of reports, despite some worries about supply chain issues and higher costs. For the third quarter, S&P 500 earnings growth is expected to rise 27.6% year-over-year, according to FactSet. That would be the third-highest growth rate since 2010.
“We’ve seen some record earnings seasons the past few quarters, so all eyes will be on if earnings can help justify stocks near all-time high levels,” said Detrick. “We do expect another solid earnings season, but we’ve seen some high profile warnings already, so corporate America could have a rather high bar to clear this quarter. Buckle up.”
Banks earnings are the main focus next week with JPMorgan, Bank of America, Morgan Stanley, Citigroup and Goldman Sachs set to report next week.
After a range-bound few months for bank stocks, analysts are looking ahead to catalysts that could fuel the next phase in their recovery. Wall Street expects loan growth, interest rates and reserve releases to all play into the major banks’ reports.
“Earnings for the third quarter quarter should again be strong and mostly outpace expectations,” said Jim Paulsen, Leuthold Group chief investment strategist. “Hours worked in the third quarter rose by about 5% suggesting real GDP for the quarter may be close to 7%. With most companies reporting strong pricing power, solid real GDP growth should result in another surprisingly strong corporate earnings season.”
Paulsen sees earnings season rewarding cyclicals, like 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, tech, and defensive toward more the economically sensitive areas of small caps and cyclical sectors,” he added.
Supply chain, higher cost warnings?
While earnings season should be strong, there are likely to be some warning signs about inflation and supply constraints that could scare the market about the year-end set-up?
“The risks of higher inflation, Fed tapering and what will likely be a choppy earnings season are still with us,” said Peter Boockvar, Bleakley Advisory Group chief investment officer.
We saw foreshadowing of this last week when Bed Bath and Beyond cratered 25% after the company said it saw a steep drop-off in traffic in August. Bed Bath & Beyond saw steeper inflation costs escalating over the summer months, especially toward the end of its second quarter in August, which corroded profits.
What investors know going into the third quarter —from company guidance — is that there could be haves and have nots this earnings season.
For the third quarter, 47 S&P 500 companies have issued negative earnings guidance and 56 companies have issued positive outlooks, according to FactSet.
Fed headwind ahead?
The headline jobs number Friday was a major disappointment as the economy added just 194,000 jobs in September, well below the the Dow Jones estimate of 500,000. On the positive side, the unemployment rate itself fell to a much lower point than economists forecast. At 4.8%, that’s the same level seen in late 2016.
It’s unclear if the number changes the calculus for when and how fast the Federal Reserve will slow its $120 billion-per-month bond-buying program.
“In our view these figures are good enough, and when combined with the debt-ceiling can being kicked down the road, likely solidifies November as ‘go time’ for tapering,” said Christopher Harvey, senior equity analyst at Wells Fargo Securities.
“We continue to expect a choppy equity market rally and a two-to-four-week tech bounce, but the bounce probably peters out next month when the Fed says those magical words: We will begin to taper,” he added.
Week ahead calendar
(Bond market closed)
6:00 a.m. NFIB Small Business Index
10:00 a.m. JOLTS Job Openings
8:30 a.m. CPI
2 p.m. FOMC Minutes
Earnings: JPMorgan Chase, BlackRock
8:30 a.m. PPI
8:30 a.m. Weekly jobless claims
Earnings: Bank of America, Morgan Stanley, Citigroup, Walgreens Boots Alliance, Wells Fargo, Domino’s Pizza, U.S. Bancorp, UnitedHealth
8:30 Retail Sales
10:00 a.m. University of Michigan Consumer Sentiment
Earnings: Goldman Sachs, J.B. Hunt, PNC Financial
— with reporting from CNBC’s Michael Bloom.