By Lewis Krauskopf
NEW YORK, Oct 9 (Reuters) - Quarterly earnings reports from major banks, along with inflation data and other economic releases next week, will offer US stock investors insight into the strength of corporate profits and the path of interest rates, two key factors influencing the market's rally.
On Tuesday, the S&P 500 hit an all-time closing high, its first since mid-August. Its year-to-date gain has swelled to more than 13% despite declines on Wednesday and Thursday.
Next Wednesday's
consumer price index report, perhaps the most closely watched inflation gauge, is among the last key data releases before the Federal Reserve meets at the end of October to decide whether to raise interest rates. The Fed hiked rates last month for the first time since 2023 to try to contain inflation.
Banks including JPMorgan and Goldman Sachs will report next week, kicking off what is expected to be an exceptionally strong quarter overall for US corporate profits. Following a robust first half, S&P 500 earnings are expected to have jumped by more than 30% in the third quarter, according to LSEG IBES.
"Earnings have been incredible this year, and we're just going to have to start to see with the banks how Q3 shaped up," said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments.
BANKS TO GIVE VIEWS ON CONSUMER, CAPITAL MARKETS
JPMorgan, Goldman, Citigroup and Wells Fargo will report results on Tuesday. Morgan Stanley and Bank of America are set to report the following day, rounding out reports from the six largest lenders.
Banks typically kick off quarterly earnings season, and the reports offer important views into the health of the overall US economy.
Matt Stucky, chief portfolio manager, equities, at Northwestern Mutual Wealth Management, said he would focus on how higher interest rates are rippling through to activity in capital markets and consumer spending.
"We've seen rates back up. We've seen energy costs back up," Stucky said. "And the question is, how is this impacting the consumer?"
Heading into the reports, bank stocks have been among the worst-performing groups recently amid a rise in Treasury yields, with the S&P 500 banks index down 9% in the past month.
"Is the market sniffing out something that is underneath the surface for these financial companies?" Miskin said. "I think there's going to be a sigh of relief if these financial services companies come out with good results next week."
Other major earnings reports next week include healthcare companies Johnson & Johnson and UnitedHealth Group, and asset manager BlackRock.
COULD CPI REVIVE RATE-HIKE BETS?
Wednesday's September CPI report is expected to show a 3.6% rise on an annual basis, according to a Reuters poll. The core measure, excluding volatile energy and food components, is estimated to increase by a more modest 2.5%. The Fed targets a 2% annual inflation rate.
Michael Reynolds, vice president of investment strategy at Glenmede, said he was concerned with "sticky" services inflation that has been showing up in reports.
"We really want to see material progress on (core services inflation) to get a little bit more confident that the Fed doesn't have to be as aggressive as maybe the market's pricing in," Reynolds said.
Reports next week on producer prices and retail sales will give a fuller picture of the economy. Traders have reduced expectations the Fed will increase rates again at its October 27-28 meeting. But data that shows a hotter economy could revive hiking bets going forward, investors said.
"If you start to see more evidence of re-accelerating inflation that's not going to come down absent a full hiking cycle from the Fed, that's where equity markets really can be under pressure," Stucky said.
The Fed's move to start hiking rates has been one factor pushing Treasury yields higher. The benchmark 10-year yield was last around 5.23%, after recently reaching its highest level in 24 years.
Higher yields pose a number of obstacles for equity performance, including by making bonds more competitive investments and by pressuring stock valuations. While a 5% yield on the 10-year Treasury had been seen as a key threshold to create stock pressure, the market has avoided any significant downside thus far as yields have breached that level and then moved even higher.
"At some point, major indices are going to cry uncle on higher rates," Reynolds said.
(Reporting by Lewis Krauskopf; Editing by Colin Barr and David Gregorio)
