Stocks Advance With Earnings Season in Full Swing

As traders sifted through a flood of corporate earnings reports, stock prices rose, offering potential clues on whether the market can sustain this year's impressive rally.

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Nearly all major sectors in the S&P 500 saw gains, with the index on track for its largest two-day increase in over two months. Corporate earnings, particularly from megacap companies, need to meet high expectations, although their earnings growth is projected to slow. Tesla Inc. and Alphabet Inc. will be the first among the "Magnificent Seven" to release earnings after the market closes.

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Anthony Saglimbene from Ameriprise noted, "With high profit expectations for the Magnificent Seven, these companies need to deliver strong results. Their future outlooks will also be closely examined against their high valuations."

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The earnings season brought mixed reactions: United Parcel Service Inc., an economic indicator, faced its largest drop ever due to missed profit expectations. General Electric Co. saw a rise thanks to a positive outlook, while a disappointing forecast from NXP Semiconductors NV impacted chipmakers negatively. Texas Instruments Inc. is also set to report earnings.

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Positive earnings could provide much-needed support for stocks after a strong first half of the year. The market is under pressure entering a typically weak season, with volatility expected to increase due to the election. The S&P 500 hovered near 5,580, with gains in both a gauge of the "Magnificent Seven" megacaps and the Russell 2000 of smaller companies. Apple Inc. saw a boost following news that the company is progressing with a foldable iPhone. In contrast, LVMH fell as sales growth slowed in its largest division, reflecting reduced consumer spending on luxury items.

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Treasury 10-year yields increased by three basis points to 4.23%, preceding a $69 billion auction of two-year notes. Oil prices dropped due to technical factors triggering algorithmic selling amid low summer trading volumes. Iron ore prices fell below $100 a ton.

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Despite driving the U.S. stock rally for much of the year, big tech faced challenges last week. Investors shifted from high-performing megacap stocks to riskier, underperforming market segments, influenced by expectations of Federal Reserve rate cuts, potential new trade restrictions on chipmakers, and skepticism about the hype surrounding artificial intelligence.

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Fawad Razaqzada from City Index and Forex.com commented, "The Magnificent Seven experienced a notable decline in total return this month. Therefore, Alphabet and Tesla's results tonight will be crucial in determining if the rally continues."

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Analysts are expected to question Tesla on its robotaxi plans and scrutinize Alphabet's revenue gains from artificial intelligence.

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The top five U.S. technology firms are facing tough comparisons with their exceptional earnings from the previous year. According to Bloomberg Intelligence, their profits are expected to rise by 29% in the second quarter compared to the same period last year. Although still strong, this is a decline from the previous three quarters, making stock reactions to earnings a major uncertainty for investors.

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Bespoke Investment Group suggested that the recent weakness in these stocks before their earnings reports might not be entirely negative. "A rally leading up to earnings could set unrealistic expectations," they noted. "A lower bar can be easier to surpass."

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Solita Marcelli from UBS Global Wealth Management expressed optimism about the earnings season's impact on the equity market. "While near-term market conditions may be volatile after a period of overextended investor positioning, we believe the fundamentals remain robust," she said.

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Despite concerns about a prolonged selloff in U.S. technology megacaps, Barclays Plc strategists argue that a strong earnings outlook keeps this group attractive even after the recent downturn. Led by Venu Krishna, the team increased its year-end target for the S&P 500 Index to 5,600 points from 5,300, citing solid profit expectations for big tech. "Although our valuation assumptions for big tech are high, growth-adjusted multiples are reasonable, and we expect these companies to justify their valuations," they explained.

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Bank of America Corp. reported significant selling of U.S. stocks by its clients as the S&P 500 experienced its worst week since April. This exodus was driven by institutions and hedge funds, while retail investors were minor net buyers.

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Last week, BofA clients sold a net $7 billion of U.S. equities, marking the largest outflow since November 2020, according to quantitative strategists led by Jill Carey Hall in a research note. Technology stocks saw their first outflows since May.

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