Traders at the New York Stock Exchange. — Reuters
The health of the US consumer will be under the microscope next week as investors scrutinize corporate earnings reports and retail sales data to gauge the economic resilience that has propelled equity markets this month. With earnings season underway, stocks are on a tear. The benchmark S&P 500 is hovering near a new record high after surging over 21% this year. Driving this surge is a series of positive economic data that has largely dispelled the slowdown fears that rattled markets over the summer. Among these was a stellar jobs report earlier this month, the latest indicator that the economy is sustaining solid growth as the Federal Reserve cuts interest rates—a historically potent combination for stock market gains.
“For the most part, the majority of the economic data stream has been positive,” said Art Hogan, chief market strategist at B Riley Wealth. “Hopefully that gets confirmation with some of the more consumer-facing companies that are reporting next week.” Earnings from American Express, Netflix, United Airlines, Procter & Gamble, and several major banks will provide a comprehensive view of consumer spending, which constitutes more than two-thirds of US economic activity. Retail sales data is anticipated on October 17.
Shares of JPMorgan Chase and Wells Fargo surged as earnings season kicked off on Friday, after both lenders exceeded expectations. There is growing confidence that the economy will avert a downturn despite prolonged elevated interest rates. For instance, Goldman Sachs reduced the odds of a US recession in the next 12 months by five percentage points to 15% following the employment data. Robust data has bolstered this outlook. In addition to jobs, reports on consumer prices and the services sector suggest that fears of a rapidly weakening economy—triggered by disappointing labor market reports in August and September—were exaggerated.
The Citigroup Economic Surprise Index, which gauges how economic data compares to expectations, turned positive this month after being negative since the start of May. However, the consumer-spending environment has become “murkier” due to layoffs in financial services and technology companies, back-to-back hurricanes in the Southeast, and a brief dockworkers strike, said Kevin Gordon, senior investment strategist at Charles Schwab, underscoring the importance of data and company reports to provide clarity. Further insights will come from additional banks reporting in the coming days, including Bank of America and Citigroup on Tuesday.
American Express’ results will offer a glimpse into high-end consumer spending, said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. At the lower end of the income spectrum, investors are focusing on how less affluent consumers are coping with rising prices over the past few years. Brian Jacobsen, chief economist at Annex Wealth Management in Milwaukee, will be examining Netflix’s results—specifically whether the streaming service is gaining or losing customers and at what pace—to understand how lower-income consumers are reallocating their spending.
Companies will need to surpass expectations for profit growth in their quarterly reports to sustain the stock market’s valuation, which is well above its historical average. Among the small number of companies that have already reported, 79% have exceeded estimates, in line with the pace of the past four quarters, according to LSEG IBES data on Friday. More than 150 S&P 500 companies are expected to report results over the next two weeks.
Third-quarter results should affirm that large-cap corporate profit growth remains robust, analysts at UBS Global Wealth Management said in a note on Friday. “Now that the Fed has initiated its rate-cutting cycle, the economy should receive a further boost from lower interest rates on items like credit card debt and business loans.”
