Traders are currently navigating through a complex landscape of economic concerns following a robust start to the year for the stock market. As various risks loom—ranging from concerns about the economy and interest rate volatility to the ongoing political climate—the upcoming corporate earnings reports are expected to play a pivotal role in determining the trajectory of equity market performance.
The S&P 500 Index has experienced an impressive surge, climbing nearly 20% in 2024 and adding a substantial $8 trillion to its market value. This remarkable rally has been primarily fueled by anticipations of a more accommodating monetary policy alongside stable profit outlooks.
However, analysts suggest that expectations for the forthcoming earnings season might be overly optimistic. Predictions indicate a mere 4.7% increase in quarterly earnings for S&P 500 companies compared to the prior year, marking a decline from earlier forecasts of 7.9% made back in July. This projection, if accurate, would represent the slowest growth in earnings observed over the past year.
“The upcoming earnings season holds greater significance than usual,” remarks Adam Parker, founder of Trivariate Research. Investors are eager to discern whether businesses are deferring expenditures, if demand is waning, and how external factors, including geopolitical tensions and economic uncertainties, impact consumer behavior.
Beginning this week, major companies will unveil their financial results, with Delta Air Lines slated for Thursday and JPMorgan Chase & Wells Fargo scheduled for Friday. Historically, earnings seasons tend to bolster equities; however, given the current market sentiment and elevated asset positioning, any reactions might be more tempered than anticipated.
Investors encounter a multitude of considerable hurdles. With the US presidential election approaching, the fierce contest between Democrat Kamala Harris and Republican Donald Trump looms large. Additionally, the Federal Reserve has just initiated its interest rate cuts, igniting optimism about a potential economic soft-landing, yet uncertainties linger regarding the pace of these monetary adjustments. Furthermore, escalating conflicts in the Middle East are raising alarms about spiking inflation, as evidenced by a significant rise in oil prices, particularly West Texas Intermediate, which has surged by 9% in the previous week—the most notable weekly increase since March 2023.
“The reality is that earnings revisions are downbeat, indicating persistent worries about the economic landscape and reflecting typical election-year pattern,” asserts Dennis DeBusschere from 22V Research. This creates a backdrop where the earnings season may serve as a crucial moment for clarity amid widespread market apprehension.
Compounding challenges, institutional investors often find themselves with limited buying power and market trends may be subdued. Data from Goldman Sachs suggests that trend-following systematic funds are leaning towards selling US stocks, while options market instruments indicate that traders may be reticent to seize the opportunity to buy during dips.
Historical data supports a cautious approach; since 1945, whenever the S&P 500 has gained 20% in the first three quarters, it has experienced downtrodden outcomes in October roughly 70% of the time. This year’s performance through September has certainly raised expectations.
Despite these challenges, some experts express cautious optimism, pointing out that lowered earnings expectations might provide corporations with the flexibility required to surpass forecasts. “Estimates had reached an overly positive plateau, and now they are reverting to more feasible standards,” comments Ellen Hazen, chief market strategist at F.L. Putnam Investment Management, suggesting an increased probability of earnings beats as forecasts soften.
Additionally, the resilience of US corporations appears to be a silver lining, with many data indicators forecasting a sustained positive earnings cycle that should offset weaker economic signals. This trend could deliver favorable momentum for equities, especially as struggling small-cap stocks are projected to improve their margins, according to Bloomberg Intelligence.
The recent jobs report revealing an unexpected decline in the unemployment rate has alleviated some fears about labor market health. Moreover, the ongoing rate-cutting cycle initiated by the Fed has historically been kind to equities, with the S&P 500 showcasing an impressive annualized return of 15% during these periods, as highlighted by Bloomberg Intelligence.
Investors should remain attentive to the earnings landscape as it unfolds. Unless corporate results deliver significant disappointments, many believe the Federal Reserve’s policies will exert a more profound influence on markets as the year draws to a close, given the consistency observed in earnings performance thus far.
In this shifting environment, remaining informed and adaptable will be essential for both individual and institutional investors navigating the complex dynamics of the market heading into the final quarter of the year.