The Stock Market Climbed to New Highs. Here’s What Can Keep It There—or Knock It From Its Perch.

Netflix shares tumbled 10% after earnings missed forecasts. (Mario Tama/Getty Images)

Bad news gets the headlines, but the stock market just keeps going up.

Let’s face it—there was bad news aplenty this week. The U.S. government shutdown extended to 24 days, the second longest on record. Oil prices spiked after the U.S. tightened sanctions on Russia. And trade spats continue to get attention, with President Donald Trump cutting off talks with Canada following Ontario’s advertisement featuring Ronald Reagan. Even some high-profile reports left investors wanting: Netflix shares tumbled 10% on Oct. 22 after profits missed forecasts.

No matter. The Dow Jones Industrial Average was on pace to advance 2.3%; the S&P 500 index , 2.1%; and the Nasdaq Composite , 2.5%, this week, and all were heading for record highs.

Created with Highcharts 9.0.1Market SnapshotSource: FactSet

Created with Highcharts 9.0.1NASDAQ Composite IndexDow Jones Industrial AverageS&P 500 IndexSPDR Gold SharesOct. 20Oct. 21Oct. 22Oct. 23Oct. 24-6-4-20246%

The market got a boost from the one data point available—the delayed consumer price index report for September. That helped lift the mood since inflation was lower than expected and should cement another Federal Reserve rate cut on Oct. 29. Gold, normally considered a haven, fell, perhaps a sign that the flight to safety was fading.

But really, it all comes down to earnings. Prominent U.S. companies, including Coca-Cola, GE Aerospace, General Motors, and other bellwethers, reported healthy results, putting earnings on pace to increase by 8.9% for the third quarter based on current releases and expectations, according to Evercore ISI data. Profits could grow by nearly 13% if beats remain strong, according to Evercore strategist Julian Emanuel.

That puts the pressure on top companies to keep reporting earnings that beat Wall Street’s forecasts—and failure to do so could be met with severe consequences. According to data from FactSet, S&P 500 companies that reported earnings below forecasts through Oct. 23 fell 4% in the two days before their earnings release through the two days after it, compared with an average 2.6% drop for a stock with an earnings miss during the past five years. (FactSet looks at that four-day period to get a slightly longer view of how companies trade around earnings.) And even companies that had superb earnings—we’re looking at you, Vertiv Holdings and GE Vernova —ended lower.

Chalk the declines up to how rich the stock market is. The S&P 500 is trading at 22.2 times earnings estimates for 2026, well above its five-year average of 19.5, which means that nearly all companies will have to top forecasts to justify this premium. “Valuations are absolutely challenging,” Dec Mullarkey, managing director of investment strategy and asset allocation at SLC Management, told Barron’s. “There is a big penalty if you miss.”

With that in mind, investors should keep a close eye on the coming deluge of earnings. Five of the Magnificent Seven— Alphabet, Amazon.com, Apple, Microsoft, and Meta Platforms —are on tap to report during the week of Oct. 27. So are Dow components Visa, UnitedHealth Group, Verizon Communications, Caterpillar, Boeing, and Chevron. If too many of them stumble, the market could take a hit.

Small-cap stocks aren’t out of the woods yet either. The S&P Small Cap 600 was on track to gain 3.2% this week, and profits for the index, which slid in 2023 and 2024, are expected to increase 10% this year and surge another 20% in 2026. Together, that has investors feeling pretty good about buying smaller stocks. “If you are a small cap investor, you’re coming off a tough period,” says Bill Hench, head of the small-cap team at First Eagle Investments. “But now there is a little glimmer of hope.”

Just remember, hope isn’t a strategy—and can quickly turn to despair if results fail to live up to the hype.

Write to Paul R. La Monica at paul.lamonica@barrons.com