S&P 500; US Indexes Fundamental Weekly Forecast – Earnings Taking Center Stage, but Watch Rising Treasury Yields

The major U.S. stock index futures settled higher last week with most of the gains coming during the early part of the week. The rally helped the S&P 500 Index reach unchanged for the year. It also helped the Dow come closer to break even while the NASDAQ added to its 2018 gains.

For the week, the benchmark S&P 500 Index settled at 2670.14, up 0.50%. The blue chip Dow Jones Industrial Average finished at 24462.94, up 0.40% and the tech-driven NASDAQ Composite closed at 7142.85, up 0.60%.

Stronger-than-expected earnings growth of 18% for the S&P 500 was the primary catalyst behind last week’s strength, but investors remained concerned over headline risks such as additional tariff proposals and rapidly rising interest rates. These two factors may keep volatility at elevated levels.

The markets were also helped by an easing of tensions over North Korea, Syria and an escalating trade war between the United States and China.

Last week, the markets responded well to quarterly earnings announcements from companies such as Netflix, Johnson & Johnson, Goldman Sachs and United Health. Netflix posted a one day gain of 7 percent on stronger-than-expected current quarter guidance, and subscriber additions for the prior quarter that exceeded Wall Street Forecasts.

Not all the news was good last week. Although the technology company reported Tuesday earnings and revenue that topped analyst expectations, investors were left disappointed with the company’s forward-looking guidance. Shares of IBM fell 7.5 percent and had their worst trading day since October 24, 2014, when they dropped 7.6 percent.

Forecast

The corporate earnings season is helping to guide the indexes higher with its strong start. According to Thomson Reuters I/B/E/S, 79 percent of the S&P 500 companies that had reported through Wednesday morning surpassed earnings expectations. Meanwhile, 83 percent of those companies topped sales estimates. This is the news that may prevent a meltdown in the market.

Additional bullish factors include the upcoming talks between President Trump and North Korean President Kim Jong Un, an easing of tensions over Syria after the previous week-ends bombing of the sovereign nation and a potential trade war between the United States and China.

Last week, North Korea said its quest for nuclear weapons is “complete” and it “no longer needs” to test its weapons capability, a significant development ahead of diplomatic engagement with South Korea and the United States.

One concern for investors is rapidly rising U.S. interest rates. Last week, the benchmark 10-year Treasury Note was up roughly 10 basis points for the week. The yield on the 30-year Treasury Bond rose 8 basis points. The two-year yield hit its highest level since September 8, 2008.

Interest rates should be watched carefully because a spike in rates in February helped trigger a steep break in stocks and the return of volatility. Rising rates can be bad for stocks because, at some point, higher yielding bonds can become a more attractive investment.

In other news, earnings season will continue to take center stage this week, with more than one-third of the companies in the S&P 500 Index reporting first-quarter results. Economic data to be reported includes existing home sales on Monday, new home sales on Tuesday, and first quarter GDP on Friday.

Traders will also get a chance to react to a report on consumer confidence as well as durable goods.