Markets Daily: Stocks put to earnings test

Earnings season has arrived with a bang on Wall Street

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Markets Snapshot S&P 500 Futures 5,872.25 +0.21% Shanghai Shenzhen CSI 300 Index 3,961.34 +1.91% Bitcoin 64,802.55 +3.28% WTI Crude Oil 73.51 -2.71% Market data as of 06:28 am EST. View or Create your Watchlist Market data may be delayed depending on provider agreements.

Five things you need to know

Chinese stocks rebounded from their worst week since late July as Beijing pledged further fiscal support for the economy. Goldman upgraded its growth forecasts. Elsewhere, Bitcoin climbed to a two-week high, the price of oil dropped and S&P 500 futures are little changed. The US bond market is closed. Corporate treasurers are adding more foreign-exchange hedges in the run-up to the US election. S&P sees more sovereign bond issuers defaulting in coming years, driven by higher debt levels and increased borrowing costs. Two MIT researchers and one from the University of Chicago won the Nobel Prize in economics for research into how institutions are formed and affect prosperity.

Counting on earnings

Earnings season has arrived with a bang on Wall Street. And investors, who've spent months debating the economy's many mysteries, will now get a glimpse of the real world in action as Corporate America reveals its latest profits and losses. So far, the tidings have been good. Results on Friday from JPMorgan and Wells Fargo came in above estimates, helping to lift the S&P 500 through the 5,800 level for the first time. This week, the likes of Goldman Sachs, United Airlines and Netflix will provide fresh clues on the health of US households and businesses. Among the themes to watch: How much Big Tech's AI-driven earnings growth has slowed, and whether wage pressures are still squeezing profit margins in some industries. In truth, US companies are the envy of the world by consistently beating already high expectations for their profits, year in, year out. That big fact largely explains the boom in the S&P 500 in the post-pandemic era. Amid all manner of upheaval — massive inflation, the Federal Reserve's aggressive interest-rate hikes, political headwinds — the profit machine has chugged along. Market valuations rise, then strong earnings arrive to justify all that optimism. Yet keeping the cycle going gets harder as time goes on.  While third-quarter profits are forecast to expand 4%, the slowest rate in a year, the bar is higher for 2025 as a whole, with consensus estimates calling for earnings to rise another 14%.  That's certainly doable given economic data is still largely benign, even if consumer sentiment remains stubbornly depressed. Yet, the pace of earnings is now leaning toward the high end of the long-term average. Hitting next year's target would send the post-pandemic growth rate in S&P 500 earnings above 9% a year, well past what's been normal in post-war America. On one level, it shows how companies are firing on all cylinders. Good news. On another, it's also reason for caution for investors going forward. Broad corporate profits as a percentage of gross domestic product now sits at 15%, a level reached only twice before the pandemic. So, yes 'tis the season to rejoice in the almighty earnings power of S&P 500 companies. But spare a thought for the future. A lot is being asked of it. —Lu Wang

On the move

US casino stocks fall in premarket trading after the election of a new Macau leader, who has warned against the outsize influence of the gambling industry. Las Vegas Sands is down 2%, Wynn Resorts is 0.7% lower and Melco Resorts drops 2.2%. Gambling stocks are dropping in the UK, too, following a report that the government is weighing proposals to increase taxes on the industry by as much as £3 billion. Shares in Entain, owner of the bookmaker Ladbrokes, dropped 15%.

What's happening this week

Among the earnings highlights, besides those noted above: Bank of America, Citigroup and Morgan Stanley are set to report earnings. In Europe, LVMH and chip-equipment maker ASML are on the schedule, while Taiwan Semiconductor also is due. On the economic calendar, the big event is the European Central Bank's meeting on Thursday, at which it's set to cut interest rates for a third time despite policymakers previously indicating they would hold fire.  US data out Thursday are forecast to show steady retail sales growth and that manufacturing is still struggling. Housing starts the following day will probably point to cooler residential construction. Fed officials speaking this week include Christopher Waller, Neel Kashkari and Mary Daly. China stays in the spotlight. Figures due Friday are projected to show the economy still expanding less than the government's 5% target for 2024. See the full global economic diary. As for politics, with the US election just three weeks away, Republican presidential candidate Donald Trump will be interviewed by Bloomberg editor-in-chief John Micklethwait at the Economic Club of Chicago on Tuesday.

China passes test

Investors seem willing to give Chinese authorities the benefit of the doubt after Saturday's highly-anticipated briefing from the Ministry of Finance lacked the fireworks some had hoped for.  After initial fluctuations, the CSI 300 Index pushed decisively higher Monday for a gain of almost 2%. The daily trading range was the narrowest since before China's equities took off in late September.  Finance Minister Lan Fo'an gave investors most of what they were looking for as the economy struggles: More funding to address the housing slump, aid for financial institutions and support for local government debt (the latter was warmly welcomed in fixed-income markets). Now, officials need to work fast to deliver the to-do list. Otherwise, investors, whose confidence remains fragile, risk being disappointed again.

Bull market anniversary

As the roaring bull market of US stocks enters a third year, we look back on how it's been going.  Big Tech's triumph over everything else has been the defining story. The Magnificent 7 has soared about 170% since the lows of Oct. 12, 2022, compared with 40% for the equal-weighted S&P 500. The S&P 500 is up about 60% in the past two years. "We are almost exactly equal to the average for the first two years of all bull markets since World War II," said Sam Stovall, chief investment strategist at CFRA. "It's next year that I worry about." The index historically gains 5.2% on average in the third year.  Large caps and growth stocks tend to outperform in the third year of a bull market, according to Ned Davis Research.

Word from Wall Street "My focus would be on being hedged against an eventual market collapse. We're more fragile than we were at probably any point in the last twenty years, if not thirty years." Nassim Taleb Black Swan author and Universa Investments distinguished scientific advisor, on Bloomberg Television

What else we're reading

How catastrophe bonds failed to help Jamaica after hurricane SpaceX catches giant rocket booster using mechanical arms. Watch video. Boeing's predicament only seems to be getting worse  Volatility is coming for US stocks One of Europe's best-performing equity funds is shunning tech stocks

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