As the third-quarter earnings season kicks into high gear, the surge in crude oil prices has become the central test for corporate profitability. With Brent crude climbing 3.7% on Friday to settle at $109.86 a barrel, investors are now focused on which companies can successfully pass on these elevated input costs to consumers without sacrificing demand.
The stakes are elevated, as expectations were already running high. According to FactSet Research Systems data cited in an Associated Press week-ahead report, analysts project S&P 500 profit growth of nearly 30% for the quarter. Energy and technology sectors are leading the forecasts, but the recent oil spike threatens to upend those estimates for companies with thinner margins.
The market's response to the oil rally was mixed last week. The S&P 500 slipped 1.9%, while the tech-heavy Nasdaq Composite tumbled 4.5%. In contrast, the Dow Jones Industrial Average managed a 0.7% gain, reflecting a rotation into more defensive and energy-linked stocks. Notably, Exxon Mobil and Chevron both advanced, rising 2.5% and 2.6% respectively, as investors sought refuge in energy names.
Breadth data painted a more nuanced picture. While slightly more than half of S&P 500 components fell on Friday, the decline was heavily concentrated in technology, with 68 of the index's 75 tech shares closing lower. This suggests the selloff was not a broad-based retreat but rather a sector-specific repricing.
Bonds offered little relief from the earnings uncertainty. The 10-year Treasury yield finished the week at 5.09%, down 15 basis points from the prior week, yet still at historically elevated levels. The dollar also eased on Friday, providing some support to commodities. ING Groep strategists Warren Patterson and Ewa Manthey noted that oil prices are now "pricing in a significant risk premium" due to ongoing supply concerns.
Fresh inflation data underscored the cost pressures facing businesses. The consumer-price index rose 0.6% in September, translating to a 3.7% annual gain, with gasoline prices surging 9.1% for the month. The producer-price index jumped 1.3%, its largest monthly increase since March 2022, and import prices climbed 1.1%. These figures heighten the scrutiny on companies' ability to manage margins.
Tuesday marks the first major test of margin resilience. General Motors reports its results before the market opens, followed by Netflix after the close. Hasbro also reports, providing a read on discretionary consumer demand. Wednesday's slate is even more critical, with Tesla, Meta Platforms, and IBM all set to release earnings. United Airlines will also report, facing elevated fuel and labor costs. These companies' guidance will be closely watched to distinguish genuine revenue growth from mere price inflation.
Beyond earnings, the macro calendar offers additional clues. September housing starts are due Tuesday after two consecutive monthly declines. The preliminary University of Michigan consumer sentiment index fell to 46.3 from 48.1, with survey director Joanne Hsu noting that "frustration over cost-of-living continues to mount." Friday's flash purchasing-manager surveys from S&P Global will test business pricing power, followed by the final Michigan sentiment reading.
Analyst recommendations remain largely positive heading into the reports, but the bar is high. Deutsche Bank's Benjamin Black maintains a Buy on Meta with a $820 target, Wedbush's Alicia Reese reiterates a Buy on Netflix at $90, J.P. Morgan's Brian Essex keeps a Buy on IBM at $250, and UBS's Atul Maheswari maintains a Buy on United at $139. These ratings reflect optimism, but any disappointment in guidance could trigger sharp selloffs.
Risks are skewed to the downside. Another spike in oil prices could further squeeze margins, and softer guidance could extend the Nasdaq's decline even if Treasury yields moderate. With Federal Reserve officials in a communications blackout until after the October 28 rate decision, corporate guidance will be the primary driver of market sentiment this week. The housing index on Monday and the wave of earnings on Wednesday will provide the first clear signals on whether pricing power can outrun energy and financing costs.
