Earnings Season Set to Test Stock Market’s Resilience Amid Rate and Oil Price Concerns

Third-quarter earnings season begins this week, and it arrives with unusually high expectations. Wall Street analysts expect companies in the S&P 500 to report combined earnings growth of 29.6% for the quarter, according to a FactSet report released Friday, Oct. 9. That would be the third straight quarter of S&P 500 earnings growth above 25%.

Those expectations have been doing much of the work of holding the market up. The S&P 500 closed Friday at 7,811.54, just below its record high, despite a 10-year Treasury yield above 5%, elevated oil prices and concern about government deficits.

The banks go first

JPMorgan Chase (JPM), Goldman Sachs (GS), Citigroup (C) and Wells Fargo (WFC) report on Tuesday, Oct. 13, followed by Bank of America (BAC) and Morgan Stanley (MS) on Wednesday, Oct. 14. Much of the rest of corporate America follows in the weeks after.

For the banks, the commentary may matter more than the results, according to Sheraz Mian, director of research at Zacks. Because banks lend to households and work with businesses in many ways, investors will be listening for what executives say about how rising Treasury yields are affecting the economy, investment banking, dealmaking and demand for credit.

Bank stocks have trended lower in recent weeks as rates have climbed. Analysts at Keefe, Bruyette & Woods said in a note on Wednesday, Oct. 7, that "the earnings outlook for the banking sector remains generally favorable, in our view, with [earnings-per-share] revisions continuing to move higher throughout the year." But they added that "the multiple [that] the market is willing to pay for these earnings remains a bit of a moving target."

Earnings against rates

The tension running through the season is between strong profit forecasts and the rising cost of money. "Interest rates are big headwind, and offsetting that is the extremely positive earnings outlook," Mian said. He described the upbeat expectations as "absolutely essential" to supporting stocks.

Yields have risen sharply on concerns about government deficits and the economy, and heavy borrowing to fund the AI build-out has added to the pressure in the bond market. Higher yields raise the return investors can get without owning stocks, which makes current stock valuations harder to justify. "With the 10-year Treasury yield still above 5%, the hurdle for equity valuations is becoming increasingly demanding," Daniela Hathorn, senior analyst at Capital.com, wrote in emailed commentary.

At the same time, the war in Iran continues to keep oil and gasoline prices high. Consumers are still spending, but the University of Michigan's consumer sentiment survey shows they do not feel good about it.

A market split in two

The optimism is concentrated. Heading into the quarter, more companies than ever had issued upbeat outlooks for their profits, a trend strongest in technology, where spending on AI infrastructure continues despite concerns about its cost. Chip makers Micron Technology (MU) and Nvidia (NVDA) have been among the S&P 500's strongest performers on earnings.

Citi equity strategist Scott Chronert wrote that the half of the market "tied to the AI playbook should show revenue trends consistent with what we saw" in the second quarter. The other half, he said, could "express incremental conservatism" because of high oil prices and interest rates.

Ken Mahoney, CEO of Mahoney Asset Management, said third-quarter results from technology and larger companies are crucial to "holding up what otherwise is a reeling market in most other sectors at the moment." He added: "High oil prices and yields ripping puts valuations under pressure, so that earnings growth is key."

The case for caution

Not everyone is comfortable with the setup. Bob Lang, founder of the trading service Explosive Options, said markets have become "extremely complacent." "I think that's a mistake, especially since we've had this large rise not just in oil but also in interest rates," he said. "I think that there's a real threat of higher inflation down the road — even higher than we had."

Bank commentary and the 29.6% consensus

• Bank executives' comments on the effect of higher yields on loan demand, dealmaking and the broader economy.
• Whether reported earnings growth matches the 29.6% FactSet consensus.
• Guidance from companies outside the AI trade, where Citi expects more caution.
• The 10-year Treasury yield, and whether it holds above 5% as results come in.