Image shows a phone with stock charts, surrounded by pumpkin and bat graphics in the spirit of Halloween. There is an “Weekly Viewpoint” tag in the top left corner and the title of the post reads: “Spooky Headlines Shadow the Markets”.

It was a spooky week on Wall Street.

Pandemic and political concerns have led to a 4.5% drop in the S&P 500 over the last four days. On October 28, the benchmark slid 3.5%, a daily move that’s happened in less than 1% of days since 1990. Tech companies put another nail in the coffin on Thursday evening with cautious outlooks, despite blowout third quarter results.

Moves like that can make all of us feel a little anxious. But it’s easy to get tunnel vision as the headlines pick up and the market swings. Hear us out.

Chart shows weekly movement of the S&P 500 from June 12 to October 30, with a 4.5 percent drop in the last week of October. This is the steepest decline since June 12.

The best investors don’t let the short-term noise get in the way of their long-term vision. Weighing what’s happening now versus what could happen down the road can help you ground yourself when it comes to investing.

And even if you’re feeling a little nervous, we recommend looking past the headlines and digging into the data. Some recent information is signaling things could be looking up in just a few months (spoiler alert: third-quarter earnings season).

Spooked Markets

The market is getting spooked by its usual demons.

Coronavirus worries are back. The U.S.’s seven-day average of new COVID cases hit an all-time high, and infections are rising in other parts of the world. Parts of Europe are once again turning to lockdowns and restrictions to contain the spread, and concerns are increasing that a similar path might be sought in the U.S. if things continue to escalate. The timing of a vaccine continues to be crucial, but elusive. All this has led to worries about what economic activity will look like over the next several months.

The chances for pre-election stimulus have dissipated. Investors were teased with some signs of progress, but the Senate adjourned on October 27 without passing a deal. It’s tough to say when talks will continue with a presidential election in just three days, another big event that’s sparked some market jitters.

These are good reasons to be cautious, and everybody’s (understandably) focusing on the headlines right now, but there hasn’t been much attention on another big market event: third-quarter earnings season.

Comeback Season

Believe it or not, reports from nearly 60% of S&P 500 companies have shown that U.S. businesses are in the midst of an epic comeback.

Wall Street’s earnings expectations have been on the rise over the past three months, a good sign that reopening has helped businesses rebound quicker than everyone expected. To be clear, the third quarter was pretty dismal: analysts think S&P 500 profits declined 12.5% year-over-year. That’d be a pretty weak quarter by historical standards. But on the bright side, it’s 14 percentage points higher than projections in mid-July and nine percentage points higher than when the season started on October 13. Usually, you see growth end four to five percentage points higher than the start of the season.

Companies seem to be hurdling the bar well, even as it’s moved higher. About 81% of S&P 500 companies have reported third-quarter earnings higher than Wall Street’s expectations, the highest beat rate in a decade.

And if that’s not enough, things are looking increasingly brighter for next year. Growth expectations for the next two quarters have moved higher and Wall Street projects profits will grow by double-digit percentages year over year in 2021. With estimates stabilizing for next year, Wall Street is feeling increasingly confident that operating conditions will perk up in a few months.

 Chart shows year over year change in earnings from Q1 2019 to Q2 2020, alongside he projected year over year change in earnings anticipated for Q3 2020 to Q4 2021. Wall Street projects profits will grow by double-digit percentages year over year in 2021.

Earnings vs. The Market

In most quarters, a good earnings season can help to boost the market. But this time around, that hasn’t been the case. We’re just over two weeks into third-quarter earnings season and the S&P 500 is down 5.7% since October 13, the worst start to an earnings season since 2007.

Companies like UnitedHealth Group, UPS, Twitter and Caterpillar have been pummeled on their earnings days despite sales and earnings beating estimates last quarter. In fact, stocks whose sales and profits exceeded estimates — the best outcome for an earnings report — have dropped an average of 0.2% on earnings days so far.

What’s going on here? We suspect investors may be so anxious that they’re taking profits in stocks that soared into earnings season in anticipation of a bigger pullback. Companies are also taking a more cautious tone on their post-earnings calls and have been hesitant to give any future guidance at all (leaving investors to draw their own conclusions).

The Bottom Line

It’s tough to see anything beyond coronavirus and election headlines, and the resulting crazy stock swings. But don’t get too spooked.. While 2020 may be one of the toughest years ever on several fronts, 2021 continues to look promising. Right now, we’re bracing for more rough days ahead, but we’re feeling good about the earnings outlook. Earnings can help drive the market after this particular storm, too.

Markets may feel erratic at the moment, but this could be a good time to remember what you’re investing in and why. If you’re feeling brave, it may be time to step into the market and buy that stock on your wish list at a discount — it could just be the light at the end of the tunnel.

Speech bubble icon next to text "Expert Take"

Headshot of Lindsey BellLindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo-advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.

Lindsey holds a passion for teaching individuals how to become successful long-term investors. She is a contributor at CNBC, and frequently shares her insights with various publications including the Wall Street Journal, Barron’s, MarketWatch, BusinessInsider, etc. She also serves on the board of Better Investing, a non-profit organization focused on investment education.

The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.