The festive Halloween season hasn't seemed to put a damper on investors' buying spirit, with shares rebounding over the last two weeks. After reaching a low for the year in mid-October, the S&P 500 has climbed over 7 percent, led by gains in energy, financials, and materials sectors. Investors are braving numerous factors that would otherwise frighten many away in a normal market environment. Surging inflation, higher interest rates, and general economic fears have weighed on markets. Most recently, the results of China's Communist Party Congress have spooked investors the most. President Xi Jinping tightened his grip and consolidated power as he was elected to his third term while removing perceived supporters of free markets. The yuan fell to a 14-year low, while foreign investors fled Chinese stocks, with a record $2.5 billion of mainland shares sold on Monday—the largest amount recorded, going back to 2016. However, market participants are pointing to some relative optimism in one of the most fundamental drivers of stock markets: corporate earnings.
Given the challenging economic environment, expectations for the third-quarter earnings season were already dim. At the end of September, earnings for S&P 500 companies were expected to grow 2.8 percent. That's several notches below the typical high single-digit advance, especially since companies usually outperform forecasts. Currently, 185 companies have reported results, and earnings declined by 3.7 percent. While this may seem downbeat, in the context of the current economic landscape and when compared to the surge in activity during 2021, it doesn't seem all that bad. Additionally, we are still in the heart of earnings season, and most of the remaining reports will occur in the next week or two—there's still plenty of time left on the clock. So far, 72 percent of companies have beaten their estimates, and if that trend continues, aggregate results could help buoy stock prices.
At the moment, traders are preoccupied with monitoring earnings results, but they will soon return to their obsession with the Federal Reserve. Officials will meet next week to assess the progress in the Fed's fight against inflation and determine the path forward for interest rates. It's widely expected that central bankers will raise the fed funds rate by 0.75 percent on Wednesday next week. Markets are also pricing in a 0.50 percent hike in December and one or two smaller hikes in the first few months of 2023. Investors are right to be so fixated on the Fed as these rate decisions will guide the economy and financial markets forward.