Investors keep buying US equities as results season hots up

Results from big banks, airlines and Pepsi have impressed the market, but there are lots of updates still to come. Is this a bear market rally or is the worst really over?

A spurt for Wall Street shares following some resilient updates has offered hope for UK investors ahead of the forthcoming results season on this side of the Atlantic.

Shell (LSE:SHEL), Lloyds Banking Group (LSE:LLOY), NatWest Group (LSE:NWG) and Unilever (LSE:ULVR) are in the corporate diary for next week, providing bosses with their first opportunity to comment on the outlook since the deterioration in economic conditions caused by rising interest rates.

Expectations were already low heading into the US earning season, but so far Wall Street has been relieved by what it has seen, after the S&P 500 added 2.6% yesterday and the tech-focused Nasdaq posted its best performance since July.

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There were fresh gains of around 2% for leading benchmarks this afternoon, as healthcare giant Johnson & Johnson (NYSE:JNJ) beat forecasts on quarterly revenue and profits and Goldman Sachs (NYSE:GS) continued a largely reassuring run by heavyweight banks.

Revenues across the sector have fallen sharply as deal-making activity slows, with Goldman’s investment banking unit seeing a 57% drop on the strong third quarter of 2021 and 26% on the previous quarter of 2022.

But Wall Street’s banks have shown they are well capitalised and that consumer balance sheets remain solid. This resilience is needed given their caution over the economic outlook, with JP Morgan’s forecast of “significant headwinds” summing up the pessimism.

Out of around 40 S&P 500 companies to have reported their figures so far, most of the big names have seen their shares rise. Part of the reason for this has been an earlier pummelling to expectations, with Deutsche Bank reporting the second-largest downgrade to estimates outside of the pandemic since the financial crisis.

Its current consensus implies only a small beat for the season, a level that is typically seen in a recession whereas the usual average in better times is nearer 5% higher.

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Bank of America’s analysis from the first week of the US earnings season found that 42% of companies beat on both sales and earnings per share. But it notes that this is the weakest proportion since the first quarter of 2020 and follows a bigger-than-usual 7% cut heading into the reporting season.

Early readings so far point to continued strength in services and staples, with Delta Air Lines Inc (NYSE:DAL) reporting 'tremendous demand' for travel and guiding to better-than-expected fourth quarter revenues. PepsiCo Inc (NASDAQ:PEP) also lifted its guidance thanks to higher pricing.

However, analysts at Bank of America highlight signs of weakness in the demand for big-ticket items as they warn the S&P 500 is more geared towards goods rather than services.

Big US stocks due to report this week include Procter & Gamble Co (NYSE:PG) prior to tomorrow’s Wall Street opening bell, with AT&T Inc (NYSE:T) on Thursday and American Express Co (NYSE:AXP) a day later.

Deutsche Bank said there looked to be some favourable potential short-term catalysts, aided by the fact that US midterm elections will soon be out the way and that the UK now appears to be befriending markets again.

Strategist Jim Reid added: “A bear market rally is a decent possibility but if there is a US recession next year as we expect, equities will likely still be notably lower than today regardless of where they end this year.”

The S&P 500 is down by more than a fifth this year, with Bank of America reporting today that this level had made clients net buyers of US equities for the fifth straight week in a row.

It said today: “Big inflows in the last several weeks suggest that investors may believe that the market has bottomed. One risk: only 20% of our bull market signposts have been triggered versus 80%+ at prior bear market lows.”