Stocks hit fresh highs on light volume as a quiet economic calendar and a three-day weekend for the bond market focused market participants' attention on what is forecast to be a strong quarter for corporate profit growth.
Markets continued to power higher Monday, boosted by a strong start to the financial sector's reporting period. Late last week, JPMorgan Chase (JPM), the nation's biggest bank by assets, posted a better-than-expected increase in net interest income (NII) and lifted its forecast for the critical revenue stream. At the same time, Wells Fargo (WFC) reported better-than-expected earnings despite suffering a significant drop in NII.
"Financials will be a focus for the market during the next two weeks, as nearly 50% of the S&P 500 companies that are scheduled to report earnings are part of this sector," writes John Butters, senior earnings analyst at FactSet.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS) and U.S. Bancorp (USB) are just a sample of the major financial firms featured on this week's earnings calendar. Traders note their results and outlooks will help determine market sentiment throughout the week and beyond.
"The S&P 500 has a shot at its first six-week winning streak since the end of 2023, but with a light economic calendar it will probably be up to earnings to deliver more record highs this week," writes Chris Larkin, managing director, trading and investing at E*trade from Morgan Stanley. "The next two to three weeks will show whether the solid economic data we've seen in recent months is translating to corporate balance sheets."
Upside surprise for corporate profits?
Operating earnings ultimately drive share prices, and so it should be welcome news the S&P 500 is not only reporting solid earnings growth, but is on course to surpass expectations.
"The S&P 500 is reporting earnings growth of 4.1% for the third quarter, which would mark the fifth-straight quarter of year-over-year earnings growth rate reported by the index," Butters notes. "Based on the average improvement in the earnings growth rate during the earnings season, the index will likely report year-over-year growth in earnings above 7% for the third quarter."
The energy sector declined on Monday, hurt by a drop in oil prices, but the other 10 sectors of the S&P 500 advanced, with the benchmark index rising 0.8% to finish at 5,859. The blue-chip Dow Jones Industrial Average added 0.5% to 43,065, while the tech-heavy Nasdaq Composite gained 0.9% to 18,502.
Caterpillar dives on downgrade
Caterpilllar (CAT) gapped down as much as 3.5% in early trades before closing off 1.9% after Morgan Stanley downgraded the Dow Jones stock to Underweight (Sell) from Equal Weight (Hold). The world's largest manufacturer of heavy construction and mining equipment is exposed to a downturn in domestic non-residential construction activity, and now faces a "potential de-stocking downturn for U.S. construction equipment," notes analyst Angel Castillo.
The stock's year-to-date outperformance and a valuation that places an "above mid-cycle multiple" on what are close to peak earnings "suggests a negative risk-reward" scenario for shares, Castillo adds.
Castillo is hardly alone on Wall Street when it comes to becoming more cautious on CAT stock. Shares are up by a third on a price basis so far this year, leading the S&P 500 by about 10 percentage points. Meanwhile, CAT's valuation does look a bit stretched, at least on comparative terms. CAT stock changes hands at more than 18 times analysts' 2025 earnings per share forecast. That represents more than a 5% premium to their own five-year average, according to data from LSEG Stock Reports Plus.
Perhaps more concerning is how fast CAT stock is rising relative to its prospects for earnings growth. On that basis, Caterpillar shares trade at 37% premium to the S&P 500, per LSEG data.
Either way, the Street is collectively sitting on the sidelines with this name. Of the 26 analysts covering CAT surveyed by S&P Global Market Intelligence, seven call it a Strong Buy, three say Buy, 11 have it at Hold, one has it at Sell and one calls it a Strong Sell. That works out to a consensus recommendation of Hold.
Related content
- Analysts' Top S&P 500 Stocks to Buy Now
- Best Dividend Stocks to Buy for Dependable Dividend Growth
- Rising Prices: Which Goods and Services Are Driving Inflation?
-
UnitedHealth Stock Falls as Lawmakers Eye Insurers, PBMsUnitedHealth stock is continuing to fall Thursday after the introduction of bipartisan legislation targeting PBMs and healthcare giants. Here's what to know.
-
Here's How Collectibles Are TaxedCollectibles Gains on collectibles can be subject to a higher rate than for most other investments.
-
Why Adobe Stock Is Down After Its Earnings BeatAdobe stock is lower Thursday despite the tech giant beating expectations for its fiscal 2024 fourth quarter. Here's what you need to know.
-
Three Possible Tax Impacts for Retirees Under TrumpHow might a second Trump term affect your tax bill in retirement — or the inheritance tax bill for your heirs? This pro has three predictions.
-
What to Know About Leverage and Bitcoin's Meteoric RiseLeverage in the financial world can lead to astonishing success or a crushing collapse. How are investors using leverage to invest in bitcoin?
-
How Do You Know When It's Time to Change Financial Advisers?Sometimes a breakup is for the best. Here's how to handle 'the talk' and make the switch to a new professional who's a better fit for you.
-
Stock Market Today: Tech Stocks Rally as CPI Supports Lower RatesAn inline inflation report sealed the deal for a December rate cut and sent the tech sector soaring.
-
CPI Report Casts Doubt on Rate Cuts in 2025: What the Experts Are Saying About InflationCPI November Consumer Price Index data sealed the deal for a December rate cut, but the outlook for next year is less certain.
-
The Best Utility Stocks to BuyUtility stocks are defensive plays for investors, offering stability and reliable dividends. Here, we look at how you can find the best ones to buy.
-
The Best Ways to Use Your Year-End Bonus (and the Worst)'National Lampoon's Christmas Vacation' shouldn't be anyone's go-to for financial advice, but it does remind us how not to spend a holiday bonus.
