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.
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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.
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