Traders are looking at a range of risks after the stock market’s hot start to the year, from economic fears, to interest rate uncertainty, to election worries. But perhaps the most important variable determines whether stocks can continue to attract attention this week: corporate earnings.
The S&P 500 index rose about 20% in 2024, adding more than $8 trillion to its market capitalization. The increase was largely driven by expectations of monetary policy easing and a resilient profit outlook.
But the tide may be turning as analysts cut their expectations for third-quarter results. According to data compiled by Bloomberg Intelligence, companies in the S&P 500 are expected to report earnings Quarterly earnings increased 4.7% from a year ago. BI data showed that was down from the 7.9% forecast on July 12, and this would be the weakest gain in four quarters.
“This earnings season will be more important than usual,” said Adam Parker, founder of Trivariate Research. “We need specific data from businesses.”
In particular, investors are looking to see whether companies delay spending, whether demand slows, and whether customers behave differently due to geopolitical risks and uncertainty. macro or not, Parker said. “It is precisely because there is so much going on in the world that the earnings and direction of companies will be especially important now,” he said.
Reports from major companies started coming in this week, with results from Delta Airlines Inc. deadline is thursday and JPMorgan Chase & Co. and Wells Fargo & Co. scheduled for Friday.
“Earnings seasons are typically positive for stocks,” said Binky Chadha, chief global strategist and US equities at. Deutsche Bank Securities Inc. “But the strong recovery and ongoing above-average positioning (so far this earnings season) suggests the market reaction has been muted.”
There are many obstacles
The obstacles investors face today are no secret. The US presidential election is only a month away with Democrat Kamala Harris and Republican Donald Trump in a tight, fierce race. The Federal Reserve just started lowering interest rates, and while there is optimism about a soft landing for the economy, questions remain about how quickly central banks will reduce borrowing costs . And deepening conflict in the Middle East is raising fears of a return to hot inflation, with West Texas Intermediate oil prices rising 9% last week, the biggest weekly gain in March 2023.
Read more: Middle East war risks highlight the quiet comeback of Iran’s oil industry
“The bottom line is that the revisions and guidance were weak, suggesting lingering concerns about the economy and reflecting election-year seasonality,” said Dennis DeBusschere of 22V Research. “That is helping to set up the reporting season as another uncertainty-resolving event.”
Plus, to make matters more challenging, large institutional investors currently have little purchasing power and seasonal market trends are very weak.
Positioning in trend-following systematic funds is currently tilted to the downside, and options market positioning suggests traders may not be ready to buy at any price just yet. According to data from Commodity Trading Advisors, or CTA, selling in US stocks is expected even if the market is flat next month. Goldman Sachs Group Inc. and volatility funds, which buy stocks when volatility declines, leave no room for additional risk.
History also seems to be on the side of the pessimists. Data compiled by Bespoke Investment Research shows that since 1945, when the S&P 500 rose 20% in the first nine months of the year, it fell 70% in October. The index is up 21% this year to date. September.
Bar lowered
Still, there’s reason to be optimistic, namely that lowering the bar for earnings forecasts gives companies more room to beat expectations.
“The estimates were a little too optimistic and they are now moving back to more realistic levels,” said Ellen Hazen, chief market strategist at FLPutnam Investment Management. “It’s certainly easier to beat earnings now that estimates are lower.”
In fact, there’s plenty of data showing that American companies are fundamentally resilient. According to Bloomberg Intelligence, the strengthening earnings cycle will continue to offset persistently weak economic signals, pushing the stock balance in a positive direction. Even struggling small-cap stocks, which have lagged large-cap stocks this year, are expected to see improved margins, writes BI’s Michael Casper.
Friday employment reportshowed an unexpected drop in the unemployment rate, quelling some concerns about a weak labor market.
Another factor is the Fed’s easing cycle, which has long benefited US stocks. Since 1971, the S&P 500 has posted annual returns of 15% during periods when central banks have cut interest rates, data compiled by Bloomberg Intelligence show.
Those increases were even stronger when the rate-cutting cycle occurred during a non-recessionary period. In those cases, large-cap stocks averaged annual returns of 25% compared to 11% during recessions, while small-cap stocks gained 20% in non-recession periods compared to with 17% when a recession occurs.
“Unless earnings are a big disappointment, I think the Fed will have a bigger influence on markets between now and year-end just because of earnings,” said Tom Esaye, founder and president of Sevens Report Research. quite stable”. “Investors expect that to continue.”
