Investors look for gains to support record share prices By Reuters

By Lewis Krauskopf

NEW YORK (Reuters) – A high-stakes corporate earnings season begins next week, with bullish investors hoping the results will justify increasingly rich valuations on a U.S. stock market near record highs.

The case for strong US economic growth got a boost on Friday after labor market data beat expectations. Up 20% year-to-date and hovering near record highs despite the recent turmoil caused by rising geopolitical tensions in the Middle East.

A key test for the rally will arrive as corporate results begin next week. Companies need to post healthy earnings growth and a strong outlook for next year to support valuations that have crept in in recent months: At 21.5 times forward 12-month earnings estimates, the S&P 500 is trading near its most three-year high and is well above its long-term average of 15.7, according to LSEG Datastream.

“One of the few arguments the bulls can make for these high (valuation) multiples is that earnings growth continues to come in at high levels,” said Sameer Samana, chief global market strategist at Wells Fargo Investment Institute. “As prices have gone up, you really need earnings growth to probably come in at much better than expected levels.”

S&P 500 earnings are expected to have risen 4.7 percent in the third quarter from a year earlier, UBS equity strategists said in a report on Wednesday. However, earnings likely rose 8.5 percent given the historical rate of positive earnings surprises, UBS strategists said.

Such profit-beating could be needed to fuel more gains in the stock. Since 2010, S&P 500 total return has closely tracked company earnings and dividend growth, according to Jack Ablin, chief investment officer at Cresset Capital. But the index has continued since early 2023, and is now about 18 percent above expected levels based on current earnings and dividends, Ablin found.

“The market is a little over the skis here,” Ablin said. “They certainly anticipate some pretty strong earnings and dividend growth.”

US consumer price data due next week will give investors a new snapshot of the economy. A stronger-than-expected number following Friday’s jobs data could further dampen expectations of how much the Federal Reserve is expected to cut rates in coming months.

Federal funds rate futures on Friday showed pricing in a 50-basis-point cut at the Fed’s November meeting fell to 5% from more than 30% on Thursday, according to CME FedWatch.

BANKS IN THE SPOTLIGHT

Major financial firms highlight next week’s earnings reports, with JP Morgan Chase (NYSE: ), Wells Fargo and BlackRock (NYSE: ) expires on October 11.

The bank’s results provide important insight into the economy, including delinquency and credit demand, said Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments. More broadly, VanCronkhite will be looking for signs that the Fed’s initial 50-basis-point rate cut – delivered at its policy meeting last month – is already having an effect on the economy through channels such as increased car sales and other big-ticket purchases.

Ideally, such activity will be sustained even if expectations for further rate cuts continue to decline after Friday’s strong jobs report.

After the first rate cut, ideally, companies will show that demand indicators are strengthening, VanCronkhite said. “That would probably give me confidence that we’re heading more towards the soft landing,” he said.