U.S. stocks notched their best quarter since 2013 by one measure, buoyed by strong corporate earnings and economic growth, and are entering the final three months of the year just below their records.
Investors face a number of hurdles in the fourth quarter, including a contentious midterm election cycle and another expected increase in interest rates from the Federal Reserve. But a strengthening U.S. economy is expected to keep the rally going and has been a key factor in helping investors look past the continuing trade spat between the U.S. and China and other nations.
Analysts credit much of the economic growth to the tax overhaul passed last year. The changes, which included a cut to the corporate tax rate, sent companies’ profits sharply higher through the first two quarters of the year, and analysts expect third-quarter earnings to be robust as well.
The S&P 500 gained 7.2% in the third quarter, its best performance since the end of 2013, while the Dow Jones Industrial Average climbed 9%. The Nasdaq Composite rose 7.1%, extending its streak of gains to nine consecutive quarters. All three major indexes are within about 1% of their all-time highs.
Shares of health-care companies led the way in the S&P 500 in the third quarter with a gain of 14%, overtaking the technology sector, which has slumped in September. Some investors, in the wake of Facebook ’s data mishap, have cut their exposure to the big tech stocks that have driven much of this year’s rally.
Google parent Alphabet slumped 2% in September, while Apple fell 0.8% and Facebook dropped 6.4%.
Moves in Friday’s session were more muted. The Dow industrials rose 18.38 points, or less than 0.1%, to 26458.31. The S&P 500 was little changed and the tech-heavy Nasdaq Composite slipped less than 0.1%.
Tesla shares were among the biggest movers, plunging $42.75, or 14%, to $264.77, after the Securities and Exchange Commission accused Chief Executive Elon Musk of misleading shareholders about a corporate buyout in tweets last month. The declines marked Tesla’s largest percentage decline since November 2013.
The financial sector fell 1.1% in the S&P 500, a modest drop after European bank shares came under pressure amid worries about Italy’s budget.
Peter Cardillo, chief market economist at Spartan Capital Securities, said he is watching for how international trade tensions could affect quarterly results heading into the final quarter of the year.
Companies in the S&P 500 are expected to log another quarter of robust profit growth, though the pace of gains is expected to slow to 19% from the 25% recorded in the first and second quarters, according to FactSet.
Jeffrey Powell, managing partner and chief investment officer of Polaris Greystone Financial Group, said he thinks that most of the effect from the U.S.-China trade dispute will be priced in when companies report earnings next month.
“Most of what’s going on from a trade war perspective is that the two biggest kids on the playground are sizing each other up,” Mr. Powell said. “In order for the U.S. not to go into perpetuity with negative trade with other countries, we’ve got to level the playing field.”
Overseas, the Stoxx Europe 600 declined 0.8% as bank shares slipped, cutting its gains for the quarter to 0.9%. Friday’s declines came after Italy’s antiestablishment government significantly widened its budget-deficit target for next year.
But Mr. Cardillo of Spartan Capital said he wouldn’t put too much weight on what is happening in Italy. “We’re not looking at a full-blown crisis that would equate to what we saw in Greece,” he said.
Stocks in Asia rallied to end the quarter. Japan’s Nikkei rose 1.4% to an eight-month high after touching its best intraday level since 1991. It ended the quarter up 8.1%. The Shanghai Composite Index rose 1.1%, cutting its loss for the third quarter to 0.9%.