The S&P 500 has been enjoying a monumental bullish run during the past month that many market analysts were convinced could never happen. With every higher high, the “perma-bears” have become more bearish, and they’ve been adding members to their ranks. After all, the market can’t possibly go any higher — can it?
We’re going to find out the answer to that question as earnings season gets underway in earnest this week.
You’ve all heard the adage “Buy the rumor and sell the news.” Well, the S&P 500 is in a precarious situation because it appears that everyone on Wall Street, except the perma-bears, has been buying the rumor that earnings season is going to be great and that things could get even better if tax-reform passes.
With so much “rumor-buying,” the S&P 500 has risen more than 130 points since its recent low in mid-August, generating a lot of profits that are just sitting there waiting to be taken off the table if the earnings season surprises aren’t bullish enough and traders decide to “sell the news” (see Fig. 1).
Fig. 1 — S&P 500 Pre-Earnings Season Consolidation
So what type of year-over-year growth are traders looking for this earnings season?
According to FactSet, analysts estimate the S&P 500 will see 2.9% year-over-year growth for the third quarter (see Fig. 2).
Fig. 2 — S&P 500 Estimated Earnings Growth (source FactSet)
A 2.9% growth rate would be lower than the year-over-year growth rate we saw in the second quarter, and it would definitely be lower than the growth rate we saw in the first quarter, but the earnings growth we saw during those quarters was largely driven by rebounding energy prices, which seem to be moderating.
If corporate America can beat expectations and show a growth rate closer to 4.5% to 5% — similar to the fourth quarter of 2016 (see Fig. 2) — it may just be enough to keep the bullish party going for a few more quarters.
Looking forward, the analysts surveyed by FactSet are anticipating earnings growth is going to rebound once more. Currently, they are expecting the following for the next three quarters:
- Fourth quarter 2017 — earnings growth of 11.1% and revenue growth of 5.7%
- First quarter 2018 — earnings growth of 10.5% and revenue growth of 6.1%
- Second quarter 2018 — earnings growth of 10.3% and revenue growth of 5.9%
But let’s not get too far ahead of ourselves. We’ve got to make it through this quarter first.
Some banks are already behind us, but here are the important earnings announcements you should be watching early next week to see if earnings season gets off to a strong start:
Monday, Oct. 16
Tuesday, Oct. 17
- Goldman Sachs (NYSE:GS)
- CSX Corporation (NASDAQ:CSX)
- Harley-Davidson (NYSE:HOG)
- International Business Machines (NYSE:IBM)
- Johnson & Johnson (NYSE:JNJ)
- Morgan Stanley (NYSE:MS)
- Omnicom Group (NYSE:OMC)
- The Progressive Corporation (NYSE:PGR)
- UnitedHealth (NYSE:UNH)
Because the financial sector has been one of the top-performers in the market during the past month, it is at greater risk of profit-taking as traders look to “sell the news.” Citigroup (NYSE:C), Bank of America (NYSE:BAC) and JP Morgan (NYSE:JPM) all fell after announcing earnings, though BAC recovered well after the initial drop.
If financial stocks can hold onto their gains after earnings, there is a great chance the bullish uptrend will continue. However, if the financial stocks start to sell off as traders take their profits, watch out for a bit of a correction, but not a bearish retreat.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next SlingShot Trader trade and get 1 free month today by clicking here.
Most recently, John and Wade are co-options strategists of Turbo Trader Live — a live, interactive trading room service that runs two hours every trading day the market is open. Turbo Trader Live focuses on long call and put options, as well as long and short vertical spread strategies. Find out how to get in on the live trading action and start making real profits by clicking here.