US stock third-quarter reports, so far so good

In the context of the absence of official economic data in the United States and widespread market anxiety, the strong third-quarter performance reported by American companies is becoming a key pillar supporting investor confidence.

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

Sonu Varghese, a global macro strategist at Carson Group, stated, "I think the importance of earnings data has increased," and based on the earnings reported so far, the overall conclusion is that "everything looks good." It can be said that the performance of the U.S. stock market's third-quarter reports is so far so good.

Boosted by this, the S&P 500 index rose 0.6% on Thursday, accumulating a 1.1% increase for the week, just a step away from its historical high. With parts of the U.S. government shutdown lasting for weeks, key economic reports on the labor market, consumer spending, and inflation have been paused, leading to an unusual focus on corporate earnings, which have become the most important window for the market to assess the economic outlook.

Although strong earnings reports have temporarily eased market sentiment, potential risks have not completely dissipated. Trade tensions continue to affect the market. Meanwhile, recent corporate bankruptcies and fraud cases have raised investors' concerns about the health of the credit market.

Strong Start to Earnings Season, Many Giants Exceed Expectations

This earnings season has been highlighted by several leading companies that have boosted the market with outstanding performance and guidance. General Motors' stock surged 15% on Tuesday after reporting strong demand for full-size SUVs and raising its earnings guidance, marking the largest single-day gain since 2020 and closing at a historical high. On the same day, 3M also saw its stock rise 7.7% after raising its profit forecast, reaching a four-year high.

Other industries also showed encouraging performance. Dow Chemical reported a decline in third-quarter profits on Thursday, but the drop was smaller than expected, driving its stock up 13%, making it the best-performing component of the S&P 500 index for the day. Casino and resort operator Las Vegas Sands also saw its stock jump about 12% on Thursday due to international investments boosting profits beyond expectations.

Data Vacuum Highlights the Value of Financial Reports

During this special period when the government shutdown has led to a disruption in the flow of official data, investors are forced to turn to other sources of information. Bill Zox, a high-yield bond portfolio manager at Brandywine Global, described it as “like being in a casino where the dice table is closed, and everyone is crowding around the blackjack table.” He noted that his colleagues, who usually focus on macro data, have been discussing credit issues in recent conference calls because they have almost no other macro data to discuss.

To fill the information void, market participants have begun to pay more attention to data from the private sector and state level. For example, the National Association of Realtors stated on Thursday that home sales in September rose to a seven-month high. Additionally, although the U.S. Department of Labor failed to release the national weekly initial jobless claims, most state-level data that underpins that report shows that layoffs have not surged significantly since the last federal report was released a month ago.

Noise in the Credit Market and Concerns Over High Valuations

Despite strong financial report performances, the recent “noise” in the credit market has raised concerns among investors.

The sudden bankruptcies of auto parts manufacturer First Brands and subprime auto lender Tricolor, both of which are under investigation for potential fraud, have put the market on alert. Subsequently, Zions Bancorp disclosed a loan to a California real estate investor that would result in losses, leading to 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 stated, “These seem to be specific stories and don’t feel like the beginning of a credit event.”

Amidst the optimism, some investors remain cautious due to high asset prices. They believe that the current tight valuations leave very little room for error in investments. Marc Bushallow, managing director of fixed income at Manning & Napier, stated that his team is trying to be cautious when buying bonds, as the returns for taking on unusual risks do not seem worth it.

He questioned, “When valuations are so tight, what exactly are you betting on? How much room for error do you have?”