Will Trade Deal, Earnings, Fed Rate Cut Drive US Indexes into Record Highs?

The major U.S. equity indexes rose for a third straight week, finishing within striking distance of all-time highs. Earnings continued to be the catalyst behind the bullish price action. Reports that the U.S. and China are close to finalizing sections of the trade deal also boosted demand for higher yielding assets.

In the cash market last week, the benchmark S&P 500 Index settled at 3023.00, up 1.2%. It’s up 20.6% in 2019. The blue chip Dow Jones Industrial Average closed at 26958.00, up 0.7%. For the year, it’s up 15.6%. The technology-driven NASDAQ Composite Index ended the week at 8243.00, up 1.9%. It has gained 24.2% this year.

Analysts are noticing that as the trade rhetoric softens, international stocks have been outperforming U.S. stocks this month. However, as analysts at Edward Jones point out, “Both emerging-market and developed-market stocks are about 16% off their all-time highs reached back in 2007. We believe expectations for international markets are overly pessimistic, which, in our view, is creating a compelling opportunity for long-term investors.”

Corporate Earnings Drives the Action

Although the major indexes finished higher last week, it wasn’t an easy trade especially for Dow traders who had to endure being dragged down by a weak performance in shares of Boeing early in the week. NASDAQ investors had to deal with a steep drop in shares of Amazon. However, the resiliency of investors shined when the three majors rebounded late in the week to close slightly below record highs.

The S&P 500 Index briefly traded above its record closing high Friday, and came within fractions of its intraday all-time high. Meanwhile, the tech sector closed at a record high.

The technology sector was driven by shares of Intel which jumped 8.1% after the chipmaker’s results topped analyst expectations. Intel also issued better-than-expected guidance for the fourth quarter. Other chipmakers, including Nvidia, also made strong gains.

Charter Communications gained 6.2% after reporting solid financial results. The cable operator made some of the strongest gains among its fellow communications companies.

Higher bond yields helped push up bank shares and the financial sector. The yield on the 10-year Treasury rose to 1.8% from 1.76% late Thursday.

The earnings news wasn’t friendly to all companies. Utilities and real estate companies lagged the market. Amazon fell 1.1% after releasing disappointing third-quarter profits and a weak sales forecast for the holiday season.

Great Earnings Season So Far but Future Not So Bright

Earnings reports so far have mostly exceeded Wall Street analysts’ modest expectations. However, many of those that delivered improved results for the quarter have also issued disappointing profit outlooks.

Of the roughly 40% of the companies in the S&P 500 that have reported so far, 80% of them had results that topped Wall Street’s earnings forecasts, while 64% beat revenue estimates, according to FactSet.

Analysts are now saying that earnings from the S&P 500 companies for the July-September quarter will be down 3.7% from a year ago. That’s slightly better than the 4% drop that analysts were initially expecting.

As of Friday, some 38 companies in the S&P 500 had issued earnings forecasts for the fourth quarter. Of those, 26 issued negative guidance and 12 gave a positive outlook.

Big Week Ahead

The upcoming weak will feature a mix of earnings, economic indicators and an interest rate decision from the Fed. Investor reaction to these events could determine whether the S&P 500 sets a record.

Google’s parent Alphabet reports on Monday; General Motors, and drugmakers Merck and Pfizer on Tuesday; Apple and Facebook on Wednesday; and Exxon on Friday.