Earnings Are Carrying the Market and the AI Test Starts Tonight
Third-quarter earnings season is at its midpoint, and the report cards so far are better than expected. According to LSEG, about 13 percent of S&P 500 companies have reported, and 86 percent of them beat market estimates. That is well above the long-run average of 67 percent.
The pattern showed up directly in Tuesday’s trading. The Dow Jones Industrial Average rose 529.85 points, or 1.02 percent, to close at 52,495.88. The S&P 500 gained 0.28 percent to 7,712.57, and the Nasdaq Composite was little changed.
Traditional sectors, not technology, led the advance. According to the Associated Press, health care stocks rose about 2.3 percent to a record high, with Eli Lilly contributing the most to the index’s gain. Defensive sectors such as real estate and utilities also strengthened. Technology fell 0.3 percent and communication services fell 0.9 percent, the only two decliners among the 11 sectors.
Individual results drew sharply different reactions. Industrial company 3M posted adjusted earnings per share of $2.50, above the $2.40 estimate, and raised its full-year profit outlook. Its shares jumped 5.8 percent. The company also announced an expanded data center partnership with Amazon.
Defense contractor Northrop Grumman reported adjusted earnings per share of $7.89, beating the $7.22 estimate, and rose 4.6 percent. Toymaker Hasbro recorded adjusted earnings per share of $2.90 as quarterly revenue from its Magic: The Gathering card game passed $600 million for the first time, and its shares surged 11.2 percent.
Credit reporting company Equifax beat estimates with adjusted earnings per share of $2.26, against a $2.19 estimate, and rose 11.3 percent. Regional bank KeyCorp gained 4.5 percent and oilfield services company Halliburton rose 1.9 percent. General Motors, by contrast, fell 6.8 percent. Its results beat estimates and it announced a $20 billion share buyback, but the midpoint of its full-year outlook fell short of expectations.
Opinions are split on the quality of the earnings. According to FactSet, overall S&P 500 profit growth for the third quarter is expected to come in around 29 percent. Growth in the technology sector exceeds 64 percent, while estimates for health care have been cut in recent weeks. Many of the early reporters beat estimates, but they are concentrated in a few sectors such as technology and energy.
Earnings are also the backdrop holding the index near record levels. The S&P 500 sits about 1.4 percent below the record closing high it set on Oct. 6. A large share of American households’ retirement money sits in index funds that track the index, which makes the earnings season report card a report card for retirement accounts as well.
The remaining test is whether artificial intelligence spending pays off. Wall Street suffered its worst week since June last week on weakness in AI-related stocks. Investors are increasingly questioning whether the hundreds of billions of dollars pouring into data centers and semiconductors will return as actual profit.
After Tuesday’s close, Super Micro Computer raised its quarterly revenue outlook to between $18.5 billion and $19.5 billion, and its shares jumped more than 12 percent in after-hours trading. The move was read as a sign that AI server demand has not cooled, but the real verification was deferred to Wednesday night.
Tesla, Meta and IBM report after the close on Wednesday. Meta, down five straight sessions, faces questions over the balance between its AI capital spending and advertising revenue. Tesla will be tested on auto margins and progress in its robotaxi business. The second half of an earnings season that has carried the market will ultimately turn on the answers to those questions.
