Tech Giants' Earnings and Employment Data to Test Stock Market Rally
The U.S. stock market is gearing up for a week filled with potential catalysts that could affect investor sentiment, as major tech companies prepare to report their quarterly results and the October employment report is awaited. The S&P 500, which has risen 22% this year, has recently pulled back from peak levels.
According to LSEG Datastream data, the market is currently trading at a price-to-earnings ratio of 21.8 based on earnings forecasts for the next 12 months; this figure is near its highest levels in over three years. Peter Tuz, president of Chase Investment Counsel Corp, stated that the market's high valuation increases the risk of a significant decline if upcoming events do not meet expectations.
Next week, Alphabet (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), Meta Platforms (NASDAQ: META), Apple (NASDAQ: AAPL), and Amazon (NASDAQ: AMZN) will report their earnings. Collectively, these five companies, part of the "Magnificent Seven" tech giants, account for 23% of the weight of the S&P 500, which could significantly impact broader market indices.
These tech leaders are trading at an average forward P/E ratio of 35, reflecting strong profit growth compared to the rest of the S&P 500. However, the profit growth differential is expected to narrow in the coming quarters. Bryant VanCronkhite, senior portfolio manager at Allspring Global Investments, warned that if the rationale for their high multiples weakens, the potential for stock prices to decline is significant.
Investors are also monitoring how the increasing investments these companies are making in artificial intelligence are starting to pay off. According to BofA Global Research, AI "hyperscalers"—Microsoft, Amazon, Alphabet, and Meta—are expected to increase capital expenditures by 40% this year, while other companies in the S&P 500 are expected to reduce capital expenditures by 1% in 2024.
Tesla (NASDAQ: TSLA), another member of the Magnificent Seven, saw an increase in its shares on Thursday after CEO Elon Musk projected a 20-30% growth in vehicle sales for next year.
Next week will not only be the busiest week for third-quarter earnings reports, with over 150 S&P 500 companies reporting, but it will also serve as a preparation for the U.S. employment report to be released on November 1. Economists expect the report to show that 140,000 jobs were created in October. Nanette Abuhoff Jacobson, global investment strategist at Hartford Funds, emphasized the importance of wage data, noting that an increase could signal inflation concerns and impact Federal Reserve policy.
Treasury yields reached a three-month high this week; this reflects the market's expectations for a less accommodative Fed and potentially increased spending under the next president. Prediction markets have recently shown rising bets on a victory for Donald Trump, who is expected to implement policies that may contribute to inflation, including tariffs.
The period of market-sensitive events extends into next week with the U.S. elections on November 5 and the Fed’s monetary policy decision on November 7, potentially raising investor anxiety. The Cboe Volatility Index, a measure of market volatility, was hovering around 19 after closing below 15 at the end of last month.
UBS Global Wealth Management analysts advised investors to expect increased market volatility as the presidential election approaches, noting that sentiment is likely to remain fragile as November 5 draws closer.