The doom and gloom that prefaced this earnings season could be clearing to reveal a rainbow of epic proportions, and some are predicting that markets could have the best week ever this week as the bulk of S&P 500 companies announce their results.
Both the S&P 500 and the Dow finished last week only 1% away from record-breaking highs and if the stars align in the coming days, it could be very profitable week.
Last week the banking sector offered a solid performance, which has hyped the market up for an unexpectedly pleasant Q3. This week, 24% of the S&P 500 companies will report Q3 results with some of the biggest names on the docket. Macroeconomic events in the coming week could further inflate the growing optimism on Wall Street, which would create the perfect storm to push the Dow and S&P 500 skyward.
Nowhere to Go But Up
While the pundits may be building up enthusiasm about the week ahead, it’s important to note that this quarter the bar has been set exceptionally low. FactSet estimated that earnings among S&P 500 stocks would decline by 4.6% in the third quarter. Most were expecting trade tension and macroeconomic conditions to cast a shadow over results, but so far it appears that U.S. firms are more resilient than analysts gave them credit for.
Of course, there’s a chance the rosy picture that banks painted last week is the end of the story. After all, an S&P Global Market Intelligence poll suggested that the financial sector would be the second-best performing segment this earnings season. If that’s the case, missteps by the big names on the agenda next week could have a devastating effect on the current market’s performance.
Earnings to Watch
Several heavy hitters are due to report this week and consumer goods firms will be closely watched as investors try to judge whether Americans were willing to loosen the purse strings despite worries about an economic downturn. Official consumer sentiment figures are due out on Friday, but investors will be watching results from Amazon (NASDAQ:AMZN) on Thursday for clues about consumer behavior.
AMZN is expected to report EPS of $4.59 on revenue of $68.8 billion. Amazon has been on a spending spree recently which has kept the stock from breaking through the $2,000 mark that it did back in July.
Another litmus test for markets this week is Intel (NASDAQ:INTC), one of the first semiconductor stocks to report this quarter. INTC will set the tone for the rest of its peers and give investors an idea of how detrimental the trade war has been. INTC is seen reporting EPS of $1.24 on revenue of $18.05 billion.
Machinery maker Caterpillar (NYSE:CAT) will be another closely watched report on Wednesday before the bell. The firm is expected to report EPS of $2.91 on revenue of $13.4 billion as its business continues to struggle against macroeconomic headwinds. Investors will have a close eye on Caterpillar to get a better picture of the state of the global economy..
Trade Talks Weighing on the Dow
Another potential market-moving event will be the conclusion of the Trump administration’s trade talks with China. Rhetoric from both sides has become increasingly positive leading many to believe that an initial deal is in the works. If the deal is finalized, or either side is able to provide more evidence of progress, the markets will likely see a substantial bump as traders will be better able to gauge future earnings expectations.
As analysts at LPL Financial put it, “Given trade uncertainty, opportunities for positive guidance from corporate America may be limited. However, that won’t stop market-watchers from trying to gauge the impact of the U.S.-China trade conflict amid a wide range of possible outcomes.”
Investors will also be watching for key economic data this week as several big reports are due to come out. Aside from Consumer Sentiment on Friday, investors will also have an eye on Existing Home Sales and New Home Sales, due out on Tuesday and Thursday respectively, as well as manufacturing survey data for October.
The Manufacturing PMI data, due out on Thursday, has the potential to cause a swing in the markets as the August and September figures showed a contraction for the first time in three years. Another decline suggests a strong downward trend rather than a slight hiccup.
Either Way, Buckle Up
This week promises to be an exciting one if nothing else. With so many factors at play, volatility is likely for the Dow and the S&P 500.
However, if strong earnings are topped with encouraging economic data, markets could head to new highs. A positive conclusion for trade talks between the U.S. and China would be the ultimate catalyst, but even rhetoric that suggests there’s been further progress is probably enough to push both the Dow and the S&P 500 to all-time highs.
As of this writing, the author was long AMZN.
This article was edited by Sam Bourgi.