Markets Rally as Earnings Impress, Geopolitical Tensions Ease

Markets continued their rebound with a strong session, as the S&P 500 notched a 1.1% gain: its best two-day stretch since June. Solid earnings beats, especially from small caps, and signs of progress on US-China trade negotiations helped boost sentiment. While macro data remains sparse due to the government shutdown, investors leaned on corporate fundamentals and a softer tone in global tensions. Bond yields edged down and gold rallied, signaling some hedging alongside the risk-on tone.

Key Headlines & Market Movers

• Earnings Season Delivers Broad Strength: Roughly 85% of S&P 500 companies reporting so far have beaten expectations, supporting a broad-based rally. Small caps led the way, with the Russell 2000 up nearly 2%, amid expectations for over 35% year-over-year earnings growth. Analysts point to resilient activity momentum and signs that this earnings season could continue to exceed a high bar, especially as AI investment stories come under the microscope in coming days.

Trade War Rhetoric Softens, For Now: Markets welcomed news that the US and China are resuming trade talks, even as President Trump reiterated threats of tariff hikes absent a deal by Nov. 1. The shift in tone, away from earlier threats of extreme tariffs, has helped reduce investor anxiety. Soybean futures popped on hopes for revived exports, while rare earths remain in focus ahead of chip sector earnings.

• Fed Easing Expectations Hold Ahead of CPI: With economic data limited due to the recent government shutdown, attention turns to Friday’s CPI release, which will help guide the Fed’s October rate decision. Economists expect core inflation to remain sticky at 3.1%. Markets are still pricing in a 25 bps cut, as labor market risks and slowing price momentum support a more dovish policy stance.
• Underlying Market Dynamics Point to Churn, Not Collapse: Despite headline gains, average stock performance remains choppy, with broad underperformance beneath the index surface. This suggests continued sector rotation and highlights the need for active management. Still, analysts see dip buying behavior by retail investors as evidence of underlying confidence, especially with policy and earnings providing near-term support.

S&P 500 Sector Performance

Looking Ahead

This week’s spotlight shifts to big tech earnings and the delayed CPI release. Tesla’s results will kick off megacap reporting, with attention on AI-related spending and margin commentary. Volatility may persist, but the strong earnings foundation, dovish policy expectations, and improving trade rhetoric are giving investors enough reasons to stay constructive into year-end.

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