US stock Q3 earnings report, so far so good

Against the backdrop of missing official U.S. economic data and pervasive market anxiety, strong third-quarter results from U.S. companies have become a key support for investor confidence.

The latest developments show that the positive momentum of the U.S. earnings season continues. On Thursday, Intel became the latest tech giant to beat expectations, following optimistic reports from companies like Coca-Cola, 3M, and General Motors. According to LSEG data, among the 130 S&P 500 companies that have reported, as many as 86% have posted earnings above analysts' expectations.

Sonu Varghese, global macro strategist at Carson Group, said: "I think the importance of earnings data has increased," and based on the currently reported results, the overall conclusion is that "everything looks good." In short, the performance of the U.S. stock market’s Q3 reports has been, so far so good.

Boosted by this, the S&P 500 Index rose 0.6% on Thursday, up 1.1% for the week, and is now just a step away from its historical high. Since the partial U.S. government shutdown has lasted for weeks, key economic reports such as those on the labor market, consumer spending, and inflation have been suspended, giving corporate earnings unusual attention and making them the primary window for assessing the economy's direction.

Although strong earnings have temporarily eased market sentiment, potential risks have not completely disappeared. Trade tensions continue to affect the market. Meanwhile, recent corporate bankruptcies and fraud cases have led investors to question the health of the credit market.

Earnings Season Off to a Strong Start, Multiple Giants Beat Expectations

This round of earnings season has been full of highlights, with leading industry players boosting the market with impressive results and guidance. General Motors surged 15% on Tuesday, its best single-day gain since 2020 and a new high, after announcing strong demand for full-size SUVs and raising its guidance. On the same day, 3M also rose 7.7% to a four-year high after raising its profit forecasts.

Other sectors have performed encouragingly as well. Although Dow Chemical’s third-quarter profit fell on Thursday, the decline was less than expected, driving its shares up 13% and making it the best-performing S&P 500 component that day. Casino and resort operator Las Vegas Sands also soared about 12% on Thursday, as international investments boosted profits beyond expectations.

Data Vacuum Highlights the Value of Earnings

During this special period when the government shutdown has disrupted the flow of official data, investors have been forced to turn to other information sources. Bill Zox, high-yield debt portfolio manager at Brandywine Global, likens it to "being in a casino, the dice tables are closed, so everyone crowds around the blackjack table." He noted that colleagues who usually focus on macro data have been discussing credit issues on conference calls lately, simply because there is hardly any other macro data to talk about.

To fill the information gap, market participants have started to pay closer attention to private sector and state-level data. For example, the National Association of Realtors reported Thursday that September home sales rose to a seven-month high. Moreover, even though the U.S. Department of Labor failed to release the weekly national initial jobless claims data, most of the state-level data underlying that report show no significant spike in layoffs since the last federal report a month earlier.

Credit Market Noise and Concerns over High Valuations

Despite strong earnings, recent "noise" in the credit market has sparked market concern at times.

The sudden bankruptcies of auto parts maker First Brands and subprime auto loan provider Tricolor, both under investigation for potential fraud, have alerted the market. Later, Zions Bancorp disclosed that a loan to a California real estate investor would incur a loss, resulting in the worst day for bank stocks since April.

However, many investors and analysts believe that these credit issues appear to be isolated incidents rather than the beginning of systemic risk. The chief U.S. economist at T. Rowe Price said, "These seem like peculiar stories. It doesn't feel like the start of a credit event."

Amid the optimism, some investors remain cautious due to high asset prices. They believe that the current tight valuations leave very little room for error. Marc Bushallow, managing director of fixed income at Manning & Napier, said his team is trying to stay prudent when buying bonds, as the rewards for taking unusual risks don’t seem worth it.

He questioned, "When valuations are this tight, what are you actually speculating for? How much margin for error do you have?"

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