*

Friday data shows strong US labor market growth

*

S&P 500's P/E ratio of 21.5 times, well above historic

average

*

Q3 earnings expected to have climbed 4.7%, per UBS

By Lewis Krauskopf

NEW YORK, Oct 4 (Reuters) - A high-stakes corporate

earnings season kicks into gear next week, with bullish

investors hoping results will justify increasingly rich

valuations in a U.S. stock market near record highs.

The case for strong U.S. economic growth got a boost on

Friday, after labor market data came in far above expectations.

The S&P 500 is up 20% year-to-date and stands near record highs

despite recent tumult spurred by rising geopolitical tensions in

the Middle East.

A key test for the rally will arrive as corporate results

begin rolling in next week. Companies need to post healthy

profit growth and strong outlooks for next year to sustain

valuations that have crept up in recent months: At 21.5 times

future 12-month earnings estimates, the S&P 500 is trading near

its highest level in three years and is well above its long-term

average of 15.7, according to LSEG Datastream.

"One of the few rationales that the bulls can make for these

lofty (valuation) multiples is that earnings growth keeps coming

in at high levels," said Sameer Samana, senior global market

strategist at Wells Fargo Investment Institute. "With prices

having run up, you really do need that earnings growth to come

in probably at much better than expected levels."

S&P 500 earnings are expected to have climbed 4.7% in the

third quarter from a year earlier, UBS equity strategists said

in a report on Wednesday. However, earnings likely grew 8.5%

when factoring in the historical rate of positive earnings

surprises, the UBS strategists said.

Such profit beats may be needed to fuel more gains in

stocks. Since 2010, the S&P 500's total return has closely

tracked the increase in company earnings and dividends,

according to Jack Ablin, chief investment officer at Cresset

Capital. But the index has run ahead since early 2023, and is

now about 18% above expected levels, based on current earnings

and dividends, Ablin found.

"The market's a little bit over its skis here," Ablin said.

"It's certainly anticipating some pretty strong earnings and

dividend growth."

Data on U.S. consumer prices due next week will give

investors another snapshot of the economy. A stronger than

expected number, on the heels of Friday's jobs data, could

further curtail expectations for how much the Federal Reserve is

expected to cut rates in coming months.

Futures tied to the fed funds rate on Friday showed pricing

of a 50 basis point cut at the Fed's November meeting falling to

5%, from over 30% on Thursday, according to CME FedWatch.

BANKS IN SPOTLIGHT

Major financial firms highlight next week's earnings

reports, with JP Morgan Chase, Wells Fargo ( WFC ) and

BlackRock due on Oct 11.

Bank results offer an important view into the economy,

including the state of delinquencies and loan demand, said

Bryant VanCronkhite, senior portfolio manager at Allspring

Global Investments.

More broadly, VanCronkhite will be looking for signs that

the Fed's initial 50-basis point cut - delivered at its monetary

policy meeting last month - is already having an effect on the

economy through such channels as rising auto sales and other big

ticket purchases.

Ideally, such activity will be sustained even if

expectations for further rate cuts fall further following

Friday's strong jobs report.

Following the first rate cut, companies ideally will show

leading demand indicators are strengthening, VanCronkhite said.

"That would probably give me confidence that we're heading more

towards that soft landing," he said.