There are several reasons for optimism about earnings for the constituents of the S&P 500 equity index and for equities overall.

Earnings season for the third quarter of 2023 is beginning for corporate America. The reporting period for the third quarter started with a bang when PepsiCo reported a slightly better than expected quarter, and the share price responded positively. Market sentiment appears to be improving after a prolonged period of very bearish sentiment which saw private investors, professional fund managers, and aggressive traders turn negative.

In late September, before the market bounce, the market reached oversold conditions and negative trading sentiment reached extreme levels. The "put-call" ratio, which measures options to sell versus options to buy, reached a very high value of 1.9 . But equities bounced last week. The market took comfort in the benign hourly earnings data from the September employment report. This week, sentiment continues to improve as oil prices steadied after a scare following the invasion of Israel by Hamas. And the yield on the 10-year Treasury fell sharply from the highest levels seen in 16 years. The yield on the 10-year Treasury is trading below 4.6%. It reached a trading high last week of almost 4.9%.

Yields fell in part because United States Treasurys are the world’s preeminent safe haven asset and because two governors of the Federal Reserve signaled that the spike in Treasury yields made another interest rate hike by the Federal Reserve unnecessary. Higher Treasury yields are a form of restrictive monetary policy. For the moment, then, the consensus of the market is that the Federal Reserve is finished with interest rate increases. This means that market attention will turn to corporate earnings which, as noted, seemed to have bottomed in the second quarter and probably turned up in the third quarter.

Rising earnings and stable to falling interest rates are positive for equities. That is especially the case for the broad market which, excluding the so-called magnificent seven biggest technology companies, is selling for a very reasonable price earnings multiple of 15 times. The average price earnings multiple for the S&P 500 over the past two decades is about 18 times.

Using a 15 multiple on earnings generates an earnings yield of about 6.7%, a solid 2% over the yield on the 10-year Treasury.

Small-capitalization stocks appear to be slam-dunk buys as they are trading at around 11 times earnings, or an equity yield premium of 4.4% over the 10-year Treasury. Market experts say third quarter earnings should be up 2%-3% over second quarter earnings. Equally important, analysts anticipate that fourth quarter earnings will be up almost 8% on a year-on-year basis. The largest U.S. banks are expected to report outstanding earnings because net interest margins have expanded with the increase in Treasury yields.

Several of the largest technology companies appear attractively valued. For example, Nvidia is trading around 29 times forward earnings, which many would argue is not expensive given its current earnings growth rate of well over 50%. Alphabet also appears attractive. The stock is showing market leadership in part because only now are investors appreciating that YouTube attracts four times as many viewers as Netflix, the largest streaming service.

Even semiconductors are sprouting green shoots. The research firm Gartner says personal computer demand has bottomed and will turn up, which will lead to an increase in semiconductor demand. Samsung, the South Korean semiconductor company, similarly said that the outlook was brighter for the semiconductor market.

Top line: blue skies are emerging for U.S. equities.

James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes  a daily note  on finance and the economy, politics, sociology, and criminal justice.