The S&P 500 Index is currently hovering near its all-time high, ending the week at 7,722 points, which is slightly below the record of 7,817. Market participants are anticipating a strong earnings season as the third quarter results begin to be released.
According to data from FactSet, analysts expect the earnings growth rate for the third quarter to average 29.2%. This would mark the third consecutive quarter where earnings growth exceeds 25%. While the average estimate is 29.2%, the actual growth rate is projected to be higher; for instance, the second quarter growth rate was over 50%, exceeding the expected 28%.
Several sectors are driving this growth, including energy, technology, communication services, and materials. Technology companies are seeing strong results due to the artificial intelligence boom, which has increased demand for equipment. For example, Micron Technology reported revenue of $54 billion in the last quarter and estimates its first-quarter revenue will exceed $61.5 billion, with a gross margin of 86.2%. Similarly, Nvidia reported revenue of $104 billion in Q2 and guided for a 77% annual growth rate next year. Additionally, Nvidia announced an additional $150 billion share buyback this week.
The earnings growth is occurring while the index is trading at a valuation that analysts consider a bargain. The forward price-to-earnings ratio is at 19, which is lower than the five-year average of 19.5.
Macroeconomic data released this week was mixed. The Personal Consumption Expenditures (PCE) inflation report showed a slower pace of rise in August, while the economy added only 29,000 jobs. These factors have led analysts to believe the Federal Reserve will likely pause its rate hikes this year.
Technical indicators suggest the S&P 500 may be on the verge of a breakout. The index has formed an inverted head-and-shoulders pattern and is holding steady above the 50-day Exponential Moving Average (EMA) and the Supertrend indicator. Analysts at Oppenheimer, Barclays, and Goldman Sachs estimate that a move past the all-time high could drive the index to 8,000 by the end of the year.
