Oct 15 (Reuters) – The S&P 500 has been a stone’s throw away from 8,000 points since its midsummer rally, but many analysts and portfolio managers are skeptical the broad US index will close the gap despite strong third-quarter earnings expectations.
Since the last earnings season in July, oil has climbed above $105 a barrel from $84, and the US 10-year Treasury yield has pushed to its highest since 2002. Higher oil prices and rising yields don’t typically help stocks and November’s midterm elections present another layer of uncertainty.
Add to that the latest round of questions about the AI boom, which has been the strongest dynamic in markets and the economy this year, and you have a setup for a lot of disappointed investors.
“Good is not going to be enough. You’re going to have to see very, very strong results,” said Julien Lafargue, chief market strategist at Barclays Private Bank.
“People might feel that it’s prudent to take some profit, wait until we get the result of the midterms and then revisit their portfolio exposition.”
A sign the bar has risen came last week from the dour reaction to a strong report from Samsung Electronics.
The memory chipmaker projected more than $80 billion in quarterly operating profit, a world first for a tech firm, yet investors shrugged. Its shares remain nearly 40% below their June peak, though they have nearly doubled this year.
TSMC, the world’s largest manufacturer of advanced chips, struck a note of caution for 2027 due to macroeconomic uncertainties, tempering an otherwise upbeat outlook after reporting a sixth consecutive record quarterly profit on robust AI-driven demand.
The Philadelphia SE semiconductor index has fallen every day since Samsung’s blockbuster results, while a lackluster start to the US earnings season, led by banks, has only heightened concerns.
Banks’ exposure to AI financing also leaves them vulnerable to any deterioration in sentiment toward the sector, as a pullback in investment could raise questions about borrowers’ credit quality and expose lenders to potential losses.
The caution is showing up in positioning. RBC Capital Markets trimmed US technology to “market weight” and rotated into healthcare, while Citigroup dropped its “overweight” call on US equities, saying its indicators had reached levels historically seen at market peaks. The S&P 500 is up 13% this year.
TALE OF TWO MARKETS
S&P 500 earnings are expected to grow 30.6% year-over-year in the third quarter, according to Tajinder Dhillon, head of earnings and equity research at LSEG. Yet much of that growth rests on a handful of firms.
Excluding the “Magnificent Seven”, technology and energy firms, earnings for the rest of the S&P 500 is expected to grow by just 5% year-on-year, down from 14% in the previous quarter, HSBC estimated.
The same megacaps and AI winners that have powered the benchmark to record highs have also left the index heavily exposed to any stumble. A miss from one of those market leaders could reverberate through the S&P 500 in a way that strong results from dozens of smaller constituents would struggle to offset.
“When you peel back the layers, it’s like a tale of two markets,” said Alan Ebright, senior investment officer at Check Capital Management.
The divide is also evident in market breadth. Even with the S&P 500 near record highs, 62% of its components were trading below their 50-day moving averages, a gauge of short-term momentum, a Reuters analysis of LSEG data showed.
“Mega caps have helped the S&P 500 maintain an illusion of calm on the surface,” said Kevin Gordon, head of macro research and strategy at Schwab Center for Financial Research.
Higher yields have also hit rate-sensitive sectors, with housing, utilities and dividend payers lagging as Treasuries offer yield without the risk.
Not everyone is convinced. Some argue the bull market has further to run, with higher yields a test it has so far passed.
“Economic expansions and the bull markets riding on them do not expire on a set schedule,” said Jeffrey Schulze, head of economic and market strategy at Franklin Templeton.
(Reporting by Shashwat Chauhan and Niket Nishant in Bengaluru; additional reporting by Sruthi Shankar, editing by Colin Barr and Devika Syamnath)
