Record High Markets Ahead of Earnings Season

Market Moves 

Earnings season begins in earnest this week with the big banks taking the lead, and the major large-cap indexes have all surged to new record highs. Fueling the rally this past week have been dovish signals coming from Fed Chair Jerome Powell when he testified before Congress and all but confirmed a path to lower interest rates.

Markets cheered the prospect of rate cuts, which will very likely begin as soon as the end of this month, as they should be a catalyst for increased consumer and business spending and decreased borrowing costs for companies.

But now comes a major test for individual stocks and the market as a whole. This time around, earnings are expected to have been affected by the major market themes of the past several months – slowing global economic growth and trade wars. These factors may have affected earnings for the second quarter, dragging down revenue and profits.

Whether this is indeed the case remains to be seen, but analysts are cautious. Couple this caution with the fact that markets are at all-time highs, and it's clear that downside risks loom large this earnings season.

The week ahead features earnings reports from such financial heavyweights as Citigroup Inc. (C), The Goldman Sachs Group, Inc. (GS), Wells Fargo & Company (WFC), Bank of America Corporation (BAC), and JPMorgan Chase & Co. (JPM). We have a bit of chart analysis below on JPMorgan.

S&P 500 Shoots to All-Time Highs on Rate Cut Expectations

The chart of the S&P 500 (SPX) tells the whole story of the market's remarkable run. As noted, all three of the primary benchmark large-cap indexes – the S&P 500, Dow Jones Industrial Average, and Nasdaq Composite – have hit new intraday and closing all-time highs as of Friday.

Driving this record rally, as mentioned, were congressional testimonies by Fed Chair Jerome Powell that gave investors greater confidence of lower interest rates going forward. Generally speaking, lower interest rate environments often result in higher stock prices as investors recognize that declining rates help increase spending and decrease borrowing costs for companies.

As shown on the SPX chart, the index is now in uncharted territory after having shot up to new highs above 3,000. This past week, price pulled back to around the 2,960 support level, which was previous resistance, before surging to its new highs. Overall, the index is trading within a wide bullish channel that extends back to December lows.

As earnings season kicks off, the 3,000 level will be the key price area to watch. If price is able to maintain a new range above 3,000, we could see this level turn into a support area going forward. But this will, of course, depend in large part on how the first phase of the new earnings season plays out. With stocks at new all-time highs, any disappointing start to earnings could result in a sharp drop back below 3,000.

Chart showing the performance of the S&P 500 Index

Read more:

Citigroup Reports Earnings With a Positive Reaction Priced In

Cisco Systems Stock Could Test 19-Year Resistance

Snap Stock Breaks Out After Analyst Upgrades

Earnings Season Begins With Big Banks – JPM in Focus

The banks are first up next week. And JPMorgan is one of the most closely watched of these financial services behemoths. The earnings release for JPMorgan is slated for Tuesday, and the stock is going into earnings in a position of strength.

As shown on the chart, JPMorgan stock is in a strong uptrend since late December, much like the market as a whole. Key support is right around the $113.00 level. Any strong break below that level on weak earnings could potentially result in a drop towards the $107.00 support level, around where the 200-day moving average is currently situated. But any surge on better-than expected earnings could shoot the stock back up toward major resistance around the $119.30-area highs.

Chart showing the performance of JPMorgan Chase & Co.

Read more:

Topping Patterns in Real Estate ETFs Suggest Further Selling

Bond Market in Retreat After 'Powell Put'

What to Expect From Amazon Earnings

Bond Prices Pull Back to Key Support

Bond prices have been in a bull market as bond yields have tanked due to an increasingly dovish Fed. Bond yields and prices are inversely correlated – when yields fall, bond prices generally rise, as we've seen in the past several months.

As shown on the chart of the iShares 20+ Year Treasury Bond ETF (TLT), the past several days have seen bond prices pull back within the strong uptrend. As of Friday, that pullback has brought price back down to its key 50-day moving average. This moving average has served as support and resistance several times in the past. If yields continue to fall as the Fed follows through on its rate-cutting path, we could be seeing a resumption of the uptrend after the current pullback. 

Chart showing the performance of the the iShares 20+ Year Treasury Bond ETF (TLT)

U.S. Dollar Feeling Some Heat

The U.S. dollar was pressured in the latter half of the past week as dovish signals from Fed Chair Jerome Powell became clear. Generally speaking, currencies have a positive correlation with interest rates. When all other factors are kept constant, money flows toward currencies that are higher yielding and away from currencies that are lower yielding. This is the basis for the currency carry trade.

The U.S. dollar index is a primary benchmark for the U.S. dollar, as it measures the value of the dollar against a basket of other major currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

As shown on the chart, the dollar index fell further on Friday. From a longer-term perspective, the index is still in an uptrend, though its upside momentum has been waning of late. Currently, the dollar index has fallen back below its 50-day moving average. Any further drop below the 200-day moving average could signal a change in trend to the downside, especially if the Fed remains on its dovish path toward lower interest rates.

Chart showing the performance of the U.S. Dollar Index

The Bottom Line

It's all about earnings starting next week, just as markets have reached new record highs on Fed rate cut expectations. Earnings season is always important but is perhaps even more critical now that investors are concerned about slowing economic growth and the impact of trade wars, and the fact that markets are at all-time highs.

Depending on how earnings season begins to play out in the next few weeks, we could either see a sharp pullback from those record highs or continued upside momentum to new heights.

Enjoy this article? Get more by signing up for the Chart Advisor newsletter.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.