Waning concerns over recession are emerging. It's now essential for American businesses to substantiate this improvement.
Businesses in the S&P 500 are projected to show a 3.7% increase in profits compared to the previous year during the third quarter, as per FactSet predictions. This would signify the fifth consecutive quarter of profit growth.
The S&P 500 index has seen a gain of approximately 21% this year, hitting numerous record highs. The surge in artificial intelligence interest and the optimism surrounding a potential US economic "soft landing" or a period of decreasing inflation without a recession have contributed to this upward trend.
Investors are now looking towards the upcoming earnings season for insights into the health of the US economy. Recent data indicates that the nation's economy is still doing well, with job growth exceeding expectations in September. The Bureau of Economic Analysis's third-quarter estimate for US GDP growth came in at a robust 3% annual rate.
The early quarterly reports have painted a mixed picture of the US economy. PepsiCo surpassed profit estimates but fell short on revenue expectations and revised its 2024 revenue outlook. Conagra Brands recorded a decrease in quarterly sales but maintained its 2025 forecast. General Motors increased its full-year adjusted earnings guidance.
Sarah Henry, managing director at Logan Capital, stated, "It's about comprehending the economy as a whole."
The earnings season kicks off this Friday with quarterly reports from big banks such as JPMorgan Chase, Wells Fargo, and BlackRock. Wall Street will also scrutinize the September Consumer Price Index report and inflation figures due later this week.
The Federal Reserve reduced interest rates by half a point in its last meeting, bringing rates down from a 23-year high. Lower interest rates generally have a positive impact on the economy, as they decrease borrowing costs and typically boost stock prices. However, these effects take time to materialize, making the upcoming months crucial for the Fed, the economy, and the stock market.
Inflation data over the past few months indicates that price hikes are gradually moving closer to the Federal Reserve's 2% target. Investors are also monitoring developments in the Middle East following this month's conflict escalation, which pushed oil prices up and sparked concerns about potential inflation spikes.
Wall Street is also focusing on the tech companies whose substantial stock returns have driven this year's bull market. Tech stocks have faced troubles recently, in part because Wall Street is unsure if massive artificial intelligence investments will translate to enhanced corporate revenues.
Mark Malek, chief investment officer at Siebert, wrote in a Wednesday note, "Investors are expecting nothing short of explosive results."
Tech companies are anticipated to report the largest earnings growth in the S&P 500. According to FactSet's analyst poll, the information technology sector, which includes Apple and Nvidia, is projected to record a 15% earnings increase from the previous year. The communication services sector, which houses Meta Platforms and Alphabet, is predicted to see a 9.9% increase in profits.
However, some investors believe that they should look beyond just tech. The optimism surrounding a soft landing has led to a broadening of this year's stock rally into less attention-grabbing sectors, such as small-caps and value stocks. Dave Sekera, chief US market strategist at Morningstar, asserts that small-caps and value stocks are currently more affordable and attractive options than their large-cap counterparts.
Sekera further added, "That (stock rotation) has more room to continue."
Following the positive third-quarter profit growth predictions for S&P 500 businesses, some investors are now focusing on the potential gains from investing in these companies. The optimism surrounding the economy and a potential US economic soft landing have spurred interest in the stock market, particularly in sectors like small-caps and value stocks.
Given the strong performance of the S&P 500 index this year, with a 21% gain and numerous record highs, investing in business sectors with growth potential could yield significant returns.
