A retailer works in a booth on the floor of the New York Stock Exchange (NYSE) in New York City, October 6, 2021.
Brendan McDermid | Reuters
Stocks have been tough to hold this week and the start of earnings season next week could further bolster the comeback if gains come in as expected or better.
The big averages had a successful week after exiting the Washington debt ceiling debacle. Legislators have passed a short-term deal that will extend the debt ceiling through December and kick off that overhang for the market.
This week's price action also overcame rising oil prices and a disappointing job report as investors bought banking and energy stocks.
"With the Washington drama, delta worries, multi-year crude oil highs and a much weaker than expected employment figure, it must be impressed how stocks rallied this week," said Ryan Detrick, named chief market strategist at LPL Financial.
A market pullback that began in September caused the S&P 500 to plummet more than 5% from its record on Monday before stocks made a comeback. For the week, the S&P 500 was up 0.8%, just 3.4% off its record.
Goldman Sachs maintained its bullish year-end forecast earlier this week, forecasting stocks would begin to climb the wall of worry. And they did.
Goldman chief US equity strategist David Kostin said in a statement to his clients that his S&P 500 price target for 2021 is still 4,700 at the end of the year, which is almost 7% above its current level.
The company said earnings growth, rather than valuation expansion, was the primary driver behind the S&P 500's 17% return this year, adding that it should still be.
The earning season begins
The third quarter reporting season – which kicks off next week with big bank profits – is expected to be another strong set of reports despite some worries about supply chain issues and higher costs. According to FactSet, earnings in the third quarter should have increased by 27.6% compared to the previous year. That would be the third highest growth rate since 2010.
"We have seen some record earnings seasons over the past few quarters, so all eyes will be on whether the earnings can help justify stocks near all-time highs," said Detrick. "We expect another solid season of earnings, but we've already seen some high profile warnings that American companies could have a pretty high bar this quarter. Buckle up."
Bank earnings take center stage next week, with JPMorgan Chase, Bank of America, Morgan Stanley, Citigroup and Goldman Sachs reporting.
After a few months for bank stocks, analysts are looking to catalysts that could fuel the next phase of their rebound. Wall Street expects credit growth, interest rates and the release of reserves to feed into major banks' reports.
"The result for the third quarter should be strong again and largely exceed expectations," said Jim Paulsen, Chief Investment Strategist of the Leuthold Group. “Hours worked rose about 5% in the third quarter, suggesting real GDP for the quarter could be close to 7%. With most companies reporting strong pricing power, solid real GDP growth should lead to another lead surprisingly strong corporate earnings season. "
Paulsen sees cyclicals like banks and small caps more than technology stocks in the earnings season.
"I think the stock market is already showing signs of a change in leadership away from the slow-growth favorites, including growth, technology and defensive, to the more economically sensitive areas of small caps and cyclical sectors," he added.
Supply chain, higher cost warnings?
While earnings season is likely to be strong, some warning signs of inflation and supply shortages are likely to emerge that could put the market off to end the year.
"The risks of higher inflation, a slowdown by the Fed and a likely troubled earnings season remain with us," said Peter Boockvar, chief investment officer of the Bleakley Advisory Group.
That was already hinted at last week when Bed Bath and Beyond shares fell 25% after the company announced a sharp drop in traffic in August. Bed Bath & Beyond saw rising inflation costs over the summer months, particularly towards the end of the second quarter of August, which corroded profits.
What investors know about the third quarter – from company forecasts – is that there could be rabbits and non-havers this reporting season.
FactSet data shows that 47 S&P 500 companies issued negative earnings forecasts for the third quarter and 56 companies issued positive outlooks.
Fed headwinds ahead?
Friday's job headline count was a huge disappointment as the economy only created 194,000 jobs in September, well below the Dow Jones estimate of 500,000. On the positive side, the unemployment rate has fallen to a much lower level than economists are predicting. At 4.8%, this is the same level as at the end of 2016.
It's unclear if the number changes the calculation of when and how quickly the Federal Reserve will slow its $ 120 billion a month bond purchase program.
"We think these numbers are good enough, and when combined with the debt ceiling lift, November will likely solidify as the 'go-time' for tapering," said Christopher Harvey, senior equity analyst at Wells Fargo Securities.
"We continue to expect a choppy stock market rally and a two- to four-week tech rebound, but the rebound is likely to ebb next month when the Fed says those magic words: We are going to start tapering," he added.
Calendar for the week in advance
(Bond market closed)
6:00 a.m. NFIB Small Business Index
10:00 JOLTS vacancies
8:30 a.m. CPI
2 p.m. FOMC minutes
Merits: JPMorgan Chase, BlackRock
8:30 a.m. PPI
8:30 a.m. Weekly jobless claims
Merits: Bank of America, Morgan Stanley, Citigroup, Walgreens Boots Alliance, Wells Fargo, Domino & # 39; s Pizza, U.S. Bancorp, UnitedHealth
8:30 am retail sales
10:00 am University of Michigan consumer sentiment
Merits: Goldman Sachs, J.B. Hunt, PNC Financial
– with reports from Michael Bloom of CNBC.