The S&P 500 Index is hovering near its all-time high as investors turn their attention to the upcoming earnings season, which kicks off on October 13, when the biggest U.S. banks report their results. It has jumped by 13.5% this year, with the technology and energy sectors driving most of this growth.
Wall Street Expects Strong Earnings Growth
Top Wall Street analysts expect American companies to publish strong financial results in the upcoming earnings season.
FactSet (NYSE:FDS) data shows that the expected earnings growth is 29.6%. If this is the final figure, it will mark the third consecutive quarter of earnings growth above 25%.
Historically, actual earnings growth has come in well above analyst estimates, so the final figure is likely to be higher. FactSet expects third-quarter growth to end up above 35%. That would still be strong, even though it would mark a slowdown from the second quarter, when many companies booked tariff refunds.
Most of the earnings growth is being driven by several important catalysts. American banks like Goldman Sachs, Morgan Stanley, and JPMorgan are benefiting from the ongoing investment banking boom. Technology companies like Micron, SanDisk, Dell, and HP Enterprise are seeing strong demand as the data center buildup accelerates.
Further, energy companies like ExxonMobil, Chevron, and Marathon Petroleum are benefiting from the rising oil prices because of the ongoing US-Iran, Saudi Arabia-Houthi, and Ukraine-Russia wars. Brent and the West Texas Intermediate benchmarks are much higher than where they were last year. FactSet estimates that this sector will report an earnings growth rate of 121%.
Utilities are also benefiting from the rising demand for power amid the AI boom. It is expected to report an earnings growth of 7%, with most of this figure coming from independent power and renewable energy producers.
S&P 500 is Trading at Bargain Levels
The upcoming earnings season is coming at a time when the S&P 500 Index is trading at bargain levels. It has a forward price-to-earnings ratio of 19.1, lower than the five- and ten-year averages.
Some of its biggest companies are trading with valuation multiples that are lower than their historical averages. For example, Nvidia (NASDAQ:NVDA) has a forward multiple of 23, lower than the five-year average of 42. This is one reason why it decided to boost its share buyback by $150 billion.
Micron, a company whose revenue jumped by over 300% last quarter, has a forward multiple of less than 10. Other top companies like SanDisk and Western Digital are trading at significantly lower multiples.
A key risk for the index is that US bond yields continue rising, with the ten-year soaring to the highest point in over two decades. In a statement this week, Ray Dalio warned that the rising interest rates may lead to the bursting of the AI bubble.
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