US Stocks Face Reality Check in High-Bar Earnings Season

As the third-quarter earnings season kicks off, the US stock market finds itself at a critical juncture. The S&P 500 is flirting with record heights, but companies must now prove their worth with earnings growth that justifies their high valuations. The pressure is on, as investors eye reports from major players like JP Morgan Chase, Wells Fargo, and BlackRock on October 11.



The S&P 500's price-to-earnings (P/E) ratio of 21.5 is well above the historical norm of 15.7, indicating that stocks may be overpriced. To maintain investor confidence, companies must deliver earnings growth that meets or exceeds expectations. UBS forecasts a 4.7% increase in third-quarter earnings for 2024, with typical surprises potentially pushing that figure to 8.5%. However, companies are beating earnings estimates by less than the historical average, suggesting that the market may be vulnerable to a correction if earnings growth does not meet expectations.



Geopolitical tensions and inflation data will play a crucial role in shaping market sentiment during the earnings season. The upcoming US consumer price data is set to play a key role in shaping market sentiment, as strong jobs data has slashed the odds of a substantial Fed rate cut this November to just 5%. Investors will closely monitor geopolitical developments and inflation data, as these factors can impact corporate earnings and overall market performance.



The energy sector is expected to have the largest decline in earnings, with profit down more than 25% from a year ago. Three of five sub-industries have reported lower earnings, suggesting that the energy sector may miss earnings estimates. Meanwhile, the technology sector is expected to have strong earnings growth, driven by AI demand, but there is a risk that companies may miss estimates due to high expectations. The financial sector is expected to have the third-largest increase in earnings this quarter, but the sector may face challenges if interest rates are cut, impacting net interest income.



In conclusion, the US stock market faces a reality check in this high-bar earnings season. Companies must deliver earnings growth that justifies their high valuations, while investors must navigate geopolitical tensions and inflation data to maintain market confidence. As earnings reports roll in, investors should stay vigilant and make informed decisions based on the data and insights provided by the companies and the broader market.