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The S&P 500 and Dow Jones set new records on Friday as financial stocks surged. Strong quarterly earnings from major banks drove a significant jump, while fresh inflation data only fueled expectations that the Federal Reserve could cut rates as early as November.
The earnings season has started off strong, with JPMorgan Chase ending the day up 4.4%, thanks to third-quarter results that beat analysts' expectations. Moreover, the bank raised its full-year interest income forecast, which did not go unnoticed by investors.
Wells Fargo is also not far behind, with its shares rising 5.6% after reporting earnings that also beat market expectations. BlackRock, meanwhile, added 3.6% to its value, as its assets under management reached a record high for the third quarter in a row.
The success of major players has pushed the entire financial sector up, with the S&P 500 Financials Index leading the gains among all sectors of the S&P 500 Index. This creates a positive backdrop for the entire market.
"We're seeing strong results from the major financials, which sets an optimistic tone for the earnings season," said Evan Brown, portfolio manager and head of multi-asset strategy at UBS Asset Management.
Experts say strong financials could signal that the economy is heading for a so-called "soft landing," where growth continues despite inflationary pressures. "When financials post strong results, it's a positive sign for the economy as a whole," Brown added, noting that it could herald strong earnings from other industries in the coming weeks.
The major U.S. indexes ended the day with significant gains on Friday, bolstering investor confidence in the stability of the market. The Dow Jones Industrial Average rose 409.74 points, or 0.97%, to 42,863.86. The S&P 500 added 34.98 points, or 0.61%, to 5,815.03. The Nasdaq Composite also rose 60.89 points, or 0.33%, to close at 18,342.94.
The week's results were also impressive: the S&P 500 rose 1.1%, the Dow rose 1.2%, and the Nasdaq added 1.1%. This weekly gain was the fifth in a row for all three indices, which strengthens the market's position and shows stable investor interest.
The latest data from the US Department of Labor played an important role in the market dynamics. The report showed that the producer price index (PPI) was flat in September compared to the previous month, while analysts had expected a modest 0.1% increase. This gave markets a signal that inflationary pressures are still being contained.
Notably, this data follows Thursday's consumer price index (CPI) data, which was slightly better than expected. However, jobless claims were also higher than expected, adding to the cautious mood.
Scott Wren, senior global market strategist at Wells Fargo Investment Institute, said investors remain confident in a "soft landing" for the economy. Despite a modest rise in consumer prices, inflation remains under control.
"The market is almost certain that inflation will be moderate and the economy will be able to cope with the current challenges without significant shocks," he said, adding that this helps maintain a positive outlook for the coming months.
Markets continue to closely monitor inflation data, and the latest PPI reports have once again given cause for optimism. Analysts said the core index and final demand were below forecasts, indicating a slowdown in inflation pressures – a factor that investors took positively.
However, not all the data was so encouraging. The preliminary consumer sentiment index from the University of Michigan for October was 68.9, which is lower than analysts expected a value of 70.8. This may indicate that sentiment among American consumers is starting to deteriorate, which may also affect the future behavior of markets.
Despite mixed signals, the market continues to count on the Federal Reserve cutting interest rates at its November meeting. According to CME FedWatch, the probability of a 25 basis point rate cut is about 88%, while the chances that the Fed will leave rates unchanged are estimated at 12%.
Consumer durables stocks were under pressure, including due to Tesla's 8.8% drop. Despite the unveiling of the long-awaited robotaxi, the company did not provide specifics on how quickly it could begin mass production or how it would address potential regulatory issues. This has raised concerns among investors, which has been reflected in the decline in the electric vehicle maker's shares.
Amid the rise in financial stocks, the S&P 500 posted a 1.95% gain, while the S&P 500 Banks Index gained 4.2%, reaching its highest level since February 2022. Regional banks were not far behind, with the KBW Index rising 3.4%, confirming strong interest in the financial sector amid expectations of interest rate changes.
On the New York Stock Exchange, most stocks showed gains, with almost four gainers for every one that fell. A total of 455 new highs and only 44 new lows were recorded, highlighting the prevailing positive sentiment in the market.
On Friday, the Nasdaq exchange recorded a noticeable predominance of growth stocks: 3,142 shares showed growth, while 1,088 went into the red. The ratio in favor of growth was 2.89 to 1, which indicates a confident upward movement of the market. The S&P 500 index recorded 69 new 52-week highs and only one low, while the Nasdaq Composite showed 139 new highs and 84 new lows on the day.
During the trading session, US exchanges saw trades worth $10.27 billion, which is below the average activity over the past 20 trading days, which is $12.06 billion. This may indicate that despite the positive sentiment, traders are proceeding with caution as they await more data and reports.
The key factor influencing the dynamics of markets in the coming week will be data on the state of the US consumer. Investors will be closely watching corporate earnings and retail sales figures to assess the real strength of the economy, which, despite high interest rates, continues to drive stock indices higher.
The earnings season in the stock markets has started on a wave of optimism. The benchmark S&P 500 index is on track for its fifth consecutive weekly gain, continuing to move near record highs. Since the beginning of the year, the index has risen by more than 21%, which underscores the strength of the bullish trend despite external economic challenges.
This week, investors are expecting the publication of financial results from giants such as American Express, Netflix, United Airlines, Procter & Gamble and several large banks. The data will help gauge how consumer spending, which traditionally accounts for more than two-thirds of economic activity in the U.S., is faring. Particular attention will be focused on the retail sales report on October 17, which will be an important indicator for the market.
Despite persistently high interest rates, expectations that the U.S. economy will be able to avoid a recession continue to strengthen. As an example, Goldman Sachs has cut the probability of a recession in the next 12 months by five percentage points to 15%, based on the latest employment data. This is another signal that the American economy continues to stay afloat in difficult conditions.
The economic picture looks brighter than previously thought. Despite weak August and September labor market reports, fresh data suggests that fears of a weakening economy were overblown. Employment, inflation, and services data suggest that the U.S. economy continues to show resilience despite the challenges of recent months.
Citigroup's Economic Surprise Index, which tracks how closely actual economic data meets expectations, has returned to positive territory for the first time since May. The indicator highlights that current data are beating expectations and providing grounds for optimism.
But not everything is rosy. The consumer spending environment is somewhat clouded by recent layoffs in the financial and technology sectors, the aftermath of hurricanes in the Southeast, and a brief dockworkers strike, according to Kevin Gordon, senior investment strategist at Charles Schwab. These factors are weighing on the economy, increasing the importance of upcoming corporate earnings reports.
Investors are eagerly awaiting new earnings reports from major banks like Bank of America and Citigroup on Tuesday. These data will provide insight into how financial institutions are coping with the current challenges and how consumers are adapting to the new economic environment.
American Express results will provide important insight into how wealthier consumers are spending, which is especially important in a context of rising prices. Peter Tooze, president of Chase Investment Counsel, emphasizes that premium spending data can provide insight into consumer demand among the upper-middle class.
Investors are also paying close attention to the spending patterns of lower-income consumers, who have been particularly hard hit by rising prices in recent years. Brian Jacobsen, chief economist at Annex Wealth Management, says Netflix's results will be an important indicator. In particular, subscriber additions and churn will help gauge how low-income consumers are rethinking their spending priorities in the face of economic pressures.
Companies reporting quarterly results face a major challenge: to support lofty stock market valuations, they need to show strong earnings growth. Market valuations are now significantly higher than historical averages, putting pressure on corporate earnings.
According to the latest LSEG IBES data, of the few companies that have reported, 79% have beaten analysts' estimates. This figure is in line with the last four quarters, which indicates a continued trend of beating expectations.
Over the next two weeks, investors are eagerly awaiting the release of earnings reports from more than 150 companies included in the S&P 500 index. These results will be crucial for understanding the current strength of the corporate sector and its ability to withstand economic challenges.
In their recent research note, UBS Global Wealth Management experts expressed confidence that the third quarter will confirm the stability of profit growth at large corporations. They emphasize that the ongoing cycle of rate cuts by the US Federal Reserve should provide additional stimulus to the economy. Lower interest rates can ease the burden on credit cards and business loans, which in turn will support further growth in key sectors of the economy.
With the Federal Reserve easing its monetary policy, companies can benefit from lower interest rates, which will help sustain positive market momentum. However, to do so, they must continue to deliver strong financial results that meet high investor expectations.
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