US stocks rise as big tech earnings week begins

US stocks rose on Monday, October 26, as Wall Street kicked off one of the most important earnings weeks of the year. The S and P 500 climbed 0.28 percent to approximately 7,645, recovering from last week's 0.5 percent decline. The index had closed on Friday at 7,623. The Nasdaq 100 also gained roughly 0.2 percent as investors rotated back into technology stocks ahead of major earnings reports. The Dow Jones Industrial Average showed a mixed performance after tumbling more than 600 points last Thursday on surging oil prices and inflation fears. Investors are focused on Alphabet and Microsoft, both set to report earnings this week, while the 10-year Treasury yield held near 5 percent and oil prices remained elevated above $116 per barrel. More than a third of S and P 500 companies are due to report this week, which makes the next few days a test of whether corporate profits can support current share prices.

Why US stocks moved higher on Monday

US stocks moved higher in part because investors were positioning ahead of earnings, rather than reacting to a single economic report. Monday was a quiet start to a busy week for US economic data, with October's Dallas Federal Reserve manufacturing survey and September's Chicago Federal Reserve National Activity Index the only reports due. The Federal Reserve remains in its blackout period ahead of its October 27-28 meeting, so there were no Federal Reserve speakers to move markets. The Treasury planned a $69 billion auction of 2-year notes, a reminder that government borrowing remains heavy. Nine S and P 500 components were due to report on Monday, including Verizon before the open and Welltower, Cadence Design Systems, Nucor, Public Storage, The Hartford, Brown and Brown, Principal Financial and Alexandria Real Estate Equities after the close. Verizon was in focus after reports about SpaceX wireless plans weighed on the stock. With few data releases, earnings news and moves in oil and Treasury yields did most of the work in setting the tone for US stocks.

What last week showed about US stocks

Last week was difficult for US markets overall, and the pattern varied by index. The S and P 500 fell 0.5 percent for the week ending October 23. The Nasdaq dropped 0.7 percent. The Dow gained 0.4 percent. The Russell 2000 small cap index outperformed, rising 2.0 percent, suggesting investors are finding value in domestic companies less exposed to global technology volatility. The split between large technology stocks and smaller domestic companies matters for the week ahead. If big tech earnings disappoint, the rotation into smaller companies could continue. If earnings beat expectations, money could move back into the large technology names that led the market higher earlier in the year. Oil prices added to the uncertainty last week, because higher energy costs raise costs for businesses and households and can push inflation higher. That link explains why a fall in oil prices on Monday, after a sharp weekly rise, helped support US stocks even before earnings arrived.

What big tech earnings will test

Big tech earnings will test two questions that have shaped US stocks all year. The first is whether spending on artificial intelligence is turning into revenue and profit, or whether it is mainly raising costs. The second is whether advertising, cloud services and devices are still growing at a pace that justifies current valuations. Alphabet and Microsoft report this week, and their results will be read as a signal for the wider technology sector. A strong set of results could steady the market after last week's declines. A weak set could renew the selling in technology shares that hurt the Nasdaq last week. Treasury yields will also matter. With the 10-year yield near 5 percent, investors can earn a high return from government bonds, which raises the bar for stocks. If yields fall, stocks look more attractive by comparison. If yields rise further, the pressure on share prices grows. For now, US stocks have started the week higher, but the direction for US stocks for the rest of the week will depend on earnings reports, the Federal Reserve decision, and whether oil prices stay near recent highs or fall back.