Analysts expect a third straight quarter of earnings growth above 25% as reporting season starts. Futures pointed lower on Thursday as oil jumped and the S&P 500 pulled back from a record.
| SPY, QQQ, DIA, IWM, XLI, VIX
The bull case for U.S. stocks now rests on one number, and reporting season begins in earnest next week.
The consensus calls for S&P 500 profits to have grown about 30% in the third quarter on a blended basis. A result in that range would make it three quarters running above 25%. PepsiCo reports on Thursday morning, Delta Air Lines on Friday and the largest banks on .
The setup
The S&P 500 closed at 7,801.77 on Wednesday, a day after a record. Futures pointed lower on Thursday: S&P 500 contracts were down about 0.3%, Dow futures about 0.7% and Nasdaq-100 futures about 0.5%. The Cboe Volatility Index rose about 4% to near 15.7.
Rate-sensitive groups are taking the brunt. Industrials have done worse than any other sector since Monday.
Records with lower multiples
Those highs have arrived alongside a shrinking price-to-earnings multiple. Profits, not valuations, have been carrying the index while higher rates lower what investors will pay for each dollar of earnings.
The arithmetic is unforgiving in both directions. With the multiple falling, earnings must grow faster than it shrinks just to keep the index flat. Growth near 30% leaves a wide cushion for further compression. A guidance cut, however, would hit both sides of the equation at once: lower expected earnings, valued at a multiple that rates are already pushing down.
Ten-year Treasuries yielded about 5.33% early Thursday, just off an overnight 24-year high of 5.36%. Brent crude rose about 4% to above $104 a barrel. Both make the hurdle for stocks higher: bonds offer a stronger alternative return, and energy costs threaten margins and inflation.
Courtney Garcia, a senior wealth advisor at Payne Capital Management, argued that earnings can carry the market. "If earnings remain strong, and the idea is that they probably will, if expectations are met and/or higher, that is going to sustain this rally, despite the fact that rates are higher," she said. "It's not going to derail the market."
Global markets
Overseas markets were weaker still. Seoul's Kospi lost 2.62%, Tokyo's Nikkei 225 1.42%, and Europe's Stoxx 600 about 1%.
Can Earnings Absorb Higher Yields?
One reading is that 30% growth is a powerful enough tailwind to absorb higher yields, and that the falling multiple has already priced in much of the rate pressure, leaving room for stocks to rise as companies deliver.
Another reading is that expectations this high leave little margin. Oil above $100 and long rates at multidecade highs raise costs for companies just as reporting season begins, and any guidance that reflects those costs could test a market trading near records.
The first reports
PepsiCo's results and outlook, Delta's fuel commentary on Friday and the big banks' net interest income and credit reserves next week will be the first tests of the 30% figure. Whether companies hold their fourth-quarter forecasts in the face of $100 oil may matter more than the quarter just ended.