By Lewis Krauskopf
NEW YORK (Reuters) -The U.S. stock rally confronts a potentially consequential week to keep its momentum heading into year-end, including a flood of corporate results headlined by megacap companies and a likely interest rate cut by the Federal Reserve after its two-day policy meeting.
U.S.-China trade tensions could come to a head in the coming days, while a persistent U.S. government shutdown further unsettles the backdrop for investors.
Stocks have weathered increased volatility
this month, with the S&P 500 close to its all-time high, after a 35% climb since its low for the year in April. The benchmark index is up over 14% year-to-date.
Given that the market has rallied for several months without a particularly significant decline, equities could remain choppy in the days ahead, said Chris Fasciano, chief market strategist at Commonwealth Financial Network.
"What we need to see is continued earnings beats and corporate America talking positively about the economy," Fasciano said. "When people start to get nervous, it's when they see consumer confidence coming down, or business confidence coming down."
Third-quarter earnings season is off to a solid start overall, despite disappointments this week from companies such as streamer Netflix and chipmaker Texas Instruments.
Including results from 130 companies that have reported, S&P 500 profits are estimated to have increased nearly 10% from a year ago, according to LSEG IBES data as of Thursday. So far, 86% of companies have topped analysts' earnings estimates and 81% have beaten revenue estimates - both higher than historically typical rates.
Next week is the busiest of the season, with over 170 companies expected to report. They include Microsoft, Apple, Alphabet, Amazon and Meta Platforms, five of the "Magnificent Seven," a group of companies with huge market capitalizations whose shares dominate equity indexes and which overall have posted outsized profit growth over the past couple of years.
Their profit edge over the rest of the index is narrowing, but the Magnificent Seven are still expected to post stronger results this period. Earnings for the group are expected to rise 16.6% against an 8.1% rise for the rest of the index, according to Tajinder Dhillon, senior research analyst at LSEG.
A number of the megacap companies are also key players in the artificial intelligence industry, enthusiasm for which has been a main driver of stock market performance.
"The factor that is probably going to have the most influence between now and the end of the year is going to be these big tech (reports)," said Anthony Saglimbene, chief market strategist at Ameriprise Financial. "The hurdle rate is very high for these companies coming into next week's earnings."
Other companies due to report results next week include drugmaker Eli Lilly, oil majors Exxon and Chevron and payment firms Visa and Mastercard.
The Fed is widely expected to lower its current benchmark rate of 4%-4.25% by another quarter percentage point when it decides on policy on Wednesday. With that already factored into asset prices, markets are likely to be more sensitive to any forward-looking language from Fed Chair Jerome Powell, with the central bank expected to cut rates further at its next meeting in December.
"The biggest impact would be if the Fed gave any signs that they will deviate from their rate-cutting path," said Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth.
Possibly clouding the Fed's decision-making ability is the lack of data provided by the government since its shutdown began on October 1, including delays in employment releases at a time of simmering worries about the health of the labor market.
An increasingly extended shutdown - which has already lasted longer than the average length of past shutdowns - also likely poses more risk to economic growth, said Art Hogan, chief market strategist at B Riley Wealth.
"The longer it drags on, the more the market will not be able to ignore it," Hogan said.
Investors also largely had shrugged aside trade-related risks in recent months, but renewed U.S.-China rifts have brought tensions between the world's two largest economies back to the fore.
U.S. President Donald Trump earlier this month threatened significantly higher tariffs on China to take effect November 1, after Beijing imposed export controls on rare earths. Investors will be watching developments around an anticipated meeting between Trump and Chinese leader Xi Jinping in the coming week to see if the nations can calm tensions between them.
"If tariffs rise to the levels that President Trump is threatening on China ... you would see a more volatile and probably a more negative reaction in the market, especially if (investors) anticipate that that's going to be lasting," Saglimbene said.
(Reporting by Lewis Krauskopf; Editing by Alden Bentley and Richard Chang)
