Market awaits key earnings reports

[Ben Graham]

Concerns in the US stock market are out of fashion. Pessimists are missing good trading opportunities, while a plethora of positive news is driving the S&P 500 to new heights. For the first time in history, the broad stock index has touched the 6,800 mark, thanks to impressive corporate earnings, a still-strong economy, and the Federal Reserve's intention to continue its cycle of monetary expansion. Inflation is not a hurdle to this progress. The September figures showed that the CPI is a dog that doesn't bark.

Indeed, investors were worried that soaring consumer prices would block significant monetary policy easing in 2026. Two rate cuts by the Fed in 2025 would be difficult to reverse. However, for a sustainable rally, the S&P 500 requires continued momentum. A 3% rise in inflation suggests that this momentum will persist.

US inflation dynamics

The uptick in consumer prices is not the only fear for pessimists. The shutdown shows no signs of ending, and its current timeline could subtract 0.5 percentage points from GDP for the fourth quarter. There are lingering doubts surrounding artificial intelligence — will the trillions invested pay off? It's no surprise that Deutsche Bank's excess positioning indicator has fallen from excessive to neutral levels, while long-term hedge funds, according to Goldman Sachs, have reduced their leverage.

While major players remain uncertain, the crowd continues to buy. The results from 30% of S&P 500 companies that have reported so far are encouraging. However, the moment of truth is approaching for the market. In the last week of October, tech giants such as Amazon, Apple, Meta, and Microsoft will present their earnings. Their results will serve as a litmus test, answering the question of whether the broad stock index can continue its rally.

Bloomberg experts expect the Magnificent Seven to achieve a 14% profit growth, nearly double that of all S&P 500 companies. However, in the third quarter, the growth was 27%. Current earnings estimates are the lowest since the first quarter of 2023, making it easy to surpass them. And everyone knows what happens when reality exceeds expectations: stocks rise.

Magnificent Seven profit dynamics

Corporate earnings and stubbornly low inflation are far from the only advantages for the broad stock index. Both China and the US are signaling significant progress in negotiations. Beijing reports progress on issues related to fentanyl, export controls, and shipping fees. Washington asserts that there will be no 100% tariffs, and China will increase its soybean purchases. Combined with positive news on business activity from the US, Europe, and Asia, this is boosting global risk appetite.

Technically, on the daily chart, the S&P 500 has reached the first of the two previously announced long targets at 6,800 and 6,920. A decline below 6,770 could result in a failure to reach fair value. It makes sense to shift from short-term selling to medium-term buying.

The material has been provided by InstaForex Company - www.instaforex.com