Dow Jones, Nasdaq, S&P 500 weekly preview: Q3 earnings to kick off as yields surge

Investing.com -- U.S. stocks rose Friday after a surprisingly weak September jobs report raised hopes that the Federal Reserve will hold interest rates steady at its October meeting.

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The Dow Jones Industrial Average gained 250 points, or 0.5%, to close at 51,176.46. The S&P 500 added 0.7%, or 56.27 points, to 7,722.72. The Nasdaq Composite climbed 1.2%, or 319.27 points, to 27,190.86, after hitting a record earlier in the session.

Treasury yields initially fell after the jobs data but later reversed higher, pulling stocks off their session highs. For the week, the Dow fell about 1.3% and the S&P 500 slipped 0.3%. The Nasdaq rose 0.6%, with Friday marking its third straight gain.

The S&P 500 has climbed nearly 13% this year and sits about 1% below its mid-August record. The fourth quarter is historically strong, with the index averaging a 4.2% gain since 1945 and rising 85% of the time, according to CFRA Research. That is more than double the average of any other quarter.

That seasonal tailwind faces several challenges, including a jump in bond yields and the market's apparent reliance on heavy AI spending. The 10-year Treasury yield hit 5.34% on Thursday, its highest level in 24 years, driven by expectations for strong growth, rising energy costs that are pushing up inflation, and heavier corporate debt issuance to fund AI buildouts.

The Fed raised rates last month for the first time in three years. Minutes from that meeting are due Wednesday and could offer clues on whether another hike is coming in October or December. After Friday's data, markets kept bets that the central bank would likely skip a second consecutive increase at its next meeting.

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In the meantime, earnings season is set to kick off this week with PepsiCo and Delta Air Lines among the first large companies to report, before major banks kick off the broader season the following week.

Investors are also awaiting November 3 midterm elections, which will decide control of Congress.

Morgan Stanley: "The de-rating is well advanced beneath the surface, while earnings remain strong, making revisions breadth the key differentiator this reporting season. Within that setup, Industrials present an increasingly attractive risk/reward as EPS revisions improve, and backlogs broaden."

JPMorgan: "U.S. activity remains robust, with nominal growth rates at present much higher than the nominal bond yields. The question is over the still relatively elevated investor positioning, together with full valuations, K-shaped consumer and potential for more Fed hikes being priced in. We believe SPX will make fresh highs into year end, on continued earnings uptrend and the stabilization in Tech trade."

RBC Capital Markets: "We typically update our rolling 12-month S&P 500 price target once a month, and last revisited it in early/mid September. Our target implies a gain of roughly 6% from the September 8th close, when we last froze our models. We continue to think of our forecast as higher but not heroic, and reflective of the idea that stocks can grind higher in the year ahead even though the path is unlikely to be a linear one."

Evercore ISI: "New decade+ highs in long end yields, Fed hikes and peaking EPS growth rates have all induced Sept/Oct chop and near term profit taking. Sector divergences have reached extremes. Energy (+40% YTD) outperforming along with Tech (+30% YTD) to such a degree has been rare. Even rarer is Financials underperformance (-2% YTD) simultaneously. Only 8 times since 1990 have these divergences happened to such a degree, with double digit up or down SPX outcomes each time 1 year forward. Volatility and wide-ranging outcomes are Base Case in an Unfinished Bull Market as a Volatile Fall starts. Long term, the Bull Market remains intact given the absence of Recession, a strong jobs market, and credit conditions which remain contained."

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