Action in futures markets at the start of the week points to the S&P 500
SPX
registering a new record.

Inevitably, fresh peaks cause some in the market to display nascent acrophobia. Symptoms include sweating about speed of the ascent and valuation angst.

Earnings can be a treatment for the latter. Handily, we are entering the busier part of the corporate reporting season. Wobbly bulls will want to see numbers and forecasts that make them feel their footing is secure.

“The good news is that the hurdle rate has come down aggressively,” says Mislav Matejka and the equity strategy team at JPMorgan.

The projections for fourth quarter S&P 500
SPX
aggregate earnings per share are $4 lower than achieved in the third quarter, with the year-on-year growth rate declining from 10% to only 2%, according to the JPMorgan team in a note dated Sunday.

Source: Deutsche Bank

“Given this, the actual results are likely to yet again beat the much lowered estimates,” says Matejka.

But, he adds, there’s a problem. For the market to advance further, it will require more than just earnings beats from these lower levels. It will need net earnings upgrades.

Why? Because in Matejka’s view investor sentiment is too complacent, with positioning at much higher proportions than seen through last year, and valuation multiples having rerated higher, from a price/earnings ratio of 17.5 for the S&P 500 over the past year to the current 20.

Bullish sentiment near top of the range. Source: Deutsche Bank

Meanwhile the key driver of last quarter’s rally, the decline in bond yields, is probably over for the time being.

Worryingly, early reporting has shown that earnings beats already are not being rewarded by a better stock performance — indeed, so far the average stock that has topped forecasts has lost 1% on the day, Matejka notes.

And, crucially, JPMorgan thinks the downtrend in earnings momentum is not changing as purchasing managers’ surveys show waning activity, the jobs market may weaken and companies thus struggle to maintain profit margins that are elevated.


Source: Deutsche Bank

This issue is even more problematic in Europe where “profit margins are elevated vs. typical, higher than what was the case pre-COVID for nearly 75% of them,” says Matejka.

“COVID distortions appear to have benefited cyclicals more
than the defensives, and this is where the unwind could happen,” says Matejka.

Consequently, he believes defensives will perform better in 2024. And he stay’s overweight growth versus value, preferring the U.S. to the eurozone.

But a big driver of the U.S. market of late may struggle. “Semiconductor stocks have rallied strongly over the last year, breaking away from key fundamental drivers. This gap might start closing.”

The SOX is the PHLX Semiconductor Sector. Source: Deutsche Bank.

Markets

U.S. stock-index futures
ES00,
+0.31%

YM00,
+0.29%

NQ00,
+0.46%

are higher as benchmark Treasury yields
BX:TMUBMUSD10Y
fall. The dollar
DXY
is little changed, while oil prices
CL.1,
+0.95%

are a fraction firmer and gold
GC00,
-0.21%

trades around $2,020 an ounce.

Key asset performance

Last

5d

1m

YTD

1y

S&P 500

4,839.81

1.17%

1.79%

1.47%

21.83%

Nasdaq Composite

15,310.97

2.26%

2.12%

2.00%

37.44%

10 year Treasury

4.119

17.49

22.18

23.77

59.77

Gold

2,023.40

-1.47%

-1.99%

-2.34%

4.73%

Oil

73.22

0.63%

-0.37%

2.65%

-10.29%

Data: MarketWatch. Treasury yields change expressed in basis points

For more market updates plus actionable trade ideas for stocks, options and crypto, subscribe to MarketDiem by Investor’s Business Daily.

The buzz

Seventy-nine of the S&P 500 are due to reveal their results this week, but it gets off to a slow start on Monday. Companies reporting earnings after the closing bell include Logitech International
LOGI,
-0.05%
,
United Airlines
UAL,
-2.39%
,
and Zions Bancorp
ZION,
+2.71%
.

The U.S. economic leading indicators report for December will be released at 10 a.m. Eastern.

Shares of Boeing Co.
BA,
+1.61%

are lower after the Federal Aviation Administration recommended more aircraft models of the aerospace giant should have their door plugs inspected.

Archer Daniels Midland shares
ADM,
-0.80%

are down more than 9% in premarket trade after the agribusiness giant said its chief financial officer has been placed under administrative leave, amid an investigation into accounting practices in its nutrition segment.

Macy’s Inc.
M,
-1.67%

rejected an unsolicited bid by Arkhouse Management and Brigade Capital Management to take the department-store chain private in a $5.8 billion deal.

Ron DeSantis bows out of presidential race, endorses Trump, misquotes Churchill.

Best of the web

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The spectacular failure of self-checkout technology.

Stock-market investors face an ugly election season. Can bulls take comfort in history?

The chart

The world’s two biggest economies have had widely divergent stock markets of late. The chart below from Deutsche Bank strategist Jim Reid shows just how much, using the total returns of the Nasdaq 100
NDX
and Hong Kong’s Hang Seng
HK:HSI
in U.S. dollars and rebased to 1985.

Reid poses the question: “Which would you rather own for the next 5-10 years (or beyond) if you had to choose between the two for your pension?”

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

Ticker

Security name

IBN,
+1.88%
ICICI Bank ADR

TSLA,
+0.15%
Tesla

NVDA,
+4.17%
Nvidia

PHUN,
+4.67%
Phunware

NIO,
-3.50%
NIO ADR

HDB,
-1.20%
HDFC Bank ADR

AMD,
+7.11%
Advanced Micro Devices

AAPL,
+1.55%
Apple

RIGD,
-0.46%
Reliance Industries GDR

AMC,
+1.81%
AMC Entertainment

Random reads

Mega-plague of zombie insects to hit for first time in 221 years.

Nasa finally unlocks $1 billion cannister of asteroid dust.

Japanese man so successful at doing ‘nothing’ for others, he now does it for free.

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