Market snapshot: earnings in the driving seat

Everything is going well on Wall Street, it seems, with earnings beats and record highs the order of the day. ii's head of markets runs through all the big news.

21st October 2024 08:28

by Richard Hunter from interactive investor

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The earnings season is now firmly in the driving seat and the results so far are spurring new record highs for two of the main US indices.

An estimated 75% of those companies which have reported so far have beaten expectations, with Netflix Inc (NASDAQ:NFLX) following on from a strong banking sector opening to maintain the momentum. The shares rose by 11% having beaten both earnings and revenue estimates, while also increasing guidance for the current quarter, leading to a share price gain of 88% over the last year.

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Procter & Gamble Co (NYSE:PG) also beat earnings expectations, although fellow Dow constituent American Express Co (NYSE:AXP) fell by more than 3% after missing estimates.

The general enthusiasm meant that the three main indices posted gains for the sixth consecutive week, with the Dow Jones and S&P500 recording new record highs, bringing their gains in the year to date to 14.8% and 23% respectively. Meanwhile, the more tech exposed Nasdaq has added 23.2% and is less than 1% shy of its all-time record high which was achieved in July.

In addition, the easing monetary policy backdrop has also seen interest in the mid and small-cap sectors, with lower interest rates potentially boosting those smaller companies which rely more on borrowing to grow their businesses.

At these levels, and with valuations becoming increasingly rich, the chances of a pullback increase. Quite apart from the impending election which carries its own set of uncertainties, the earnings season is still in its early stages which leaves the door open for potential disappointments.

This week, the high tempo continues with updates expected from the likes of General Motors Co (NYSE:GM), AT&T Inc (NYSE:T), Boeing Co (NYSE:BA), Coca-Cola Co (NYSE:KO), International Business Machines Corp (NYSE:IBM) and Tesla Inc (NASDAQ:TSLA).

In Asian markets, investors remain undecided on the measures taken so far by the Chinese authorities to boost the economy, with some scepticism that any fiscal boosts could have a limited impact on reviving the areas most need of attention.

While benchmark lending rates were cut overnight, this move had been highly anticipated and therefore had a limited impact on prices. More positively, there was something of a pop in technology shares, while further down the scale the smaller Beijing 50 index jumped by 14% to a record high following reports that measures would be put in place to enable small and medium-sized tech companies to list.

At the broadest level, however, the issues of weak consumer demand, high youth unemployment and a beleaguered property sector remain largely unresolved. It is unclear when the authorities will next address the market to reveal more defined details of its fiscal plans so that investors can weigh up the announced measures as a whole to estimate what impact there could be.

Equally of course, in the absence of any particularly strong and focused measures, there will be sectors which continue to suffer as well as limiting a turnaround in consumer demand, let alone a luxury sector which has more recently fallen out of favour.

Continuing Middle East tensions, a weak oil price and tepid Chinese demand have all weighed on the internationally exposed FTSE100 of late, and in opening trades the index edged marginally higher in a reflection of continued unwillingness to fully commit to the optimism being experienced on the other side of the pond.

That being said, with the third-quarter earnings season switching up a gear this week, there is the possibility of a positive read across from what was an impressive set of US banking results, as Lloyds Banking Group (LSE:LLOY), Barclays (LSE:BARC) and NatWest Group (LSE:NWG) all report over the coming days. There is likely to be more mention of the “structural hedge” boosting earnings as the more profitable part of the cycle nears, while the improvement in dealmaking could flow over to Barclays in particular within its investment banking operations.

Despite the relative indifference, the premier index has managed a respectable gain of 8.3% so far this year, with an additional average yield of 3.5% boosting the total return for investors. It remains to be seen whether the reporting season can have a similarly positive impact on investor sentiment, although at a domestic level gains could be capped until the outcome of the Budget next week is known.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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