Traders face a series of risks after the stock market’s hot start to the year, from economic concerns, to uncertainty about interest rates, to anxiety about the election. But perhaps the most important variable in whether stocks can continue to highlight returns this week: corporate earnings.
The S&P 500 rose nearly 20% in 2024, adding more than $8 trillion to its market value. The gains were largely driven by expectations of monetary policy easing and resilient earnings expectations.
But the tide may be turning as analysts lower their expectations for third-quarter results. Companies in the S&P 500 are expected to report a 4.7% increase in quarterly profits compared to last year, according to data compiled by Bloomberg Intelligence. This is below expectations of 7.9% on July 12, and would represent the weakest increase in four quarters, BI data shows.
“Earnings season will be more important than usual this time,” said Adam Parker, founder of Trivariate Research. “We need concrete data from companies.”
In particular, investors are keen to know whether companies are deferring spending, whether demand has slowed, and whether customers are behaving differently due to geopolitical risks and macro uncertainty, Parker said. “Because there is so much going on in the world, corporate earnings and guidance will be especially important now,” he said.
Reports from major companies start arriving this week, and results from Delta Air Lines Inc. are due. On Thursday, JPMorgan Chase & Co.’s results are scheduled to be released. and Wells Fargo & Co. Friday.
“Earnings seasons are usually positive for stocks,” said Pinky Chadha, chief U.S. equity strategist and global strategist at Deutsche Bank Securities. “But the strong rally and above-average positions occurring (this earnings season) indicate a weak market reaction.” “.
Obstacles abound
The hurdles facing investors right now are no secret. We are just one month away from the US presidential election, where Democratic candidates Kamala Harris and Republican Donald Trump are competing in a fierce and close race. The Federal Reserve has just begun cutting interest rates, and while there is optimism about a soft economic landing, questions remain about how quickly central bankers will reduce borrowing costs. The worsening conflict in the Middle East is raising concerns about inflation rising again, with the price of West Texas Intermediate crude rising 9% last week, the largest weekly gain in March 2023.
Read more: The threat of war in the Middle East highlights the quiet return of Iranian oil
“The bottom line is that revisions and guidance are weak, indicating continued concerns about the economy and reflecting some election-year seasonality,” said Denis DeBusschere of 22V Research. “This helps set up the reporting season as another uncertainty-removing event.”
Additionally, to make matters more difficult, large institutional investors have little purchasing power at the moment and seasonal market trends are weak.
Positioning in trend-following systematic funds is now skewed to the downside, and the options market situation shows that traders may not be willing to buy any dips. Commodity trading advisors, or CTAs, are expected to sell US stocks even if the market remains flat next month, according to data from Goldman Sachs Group. Volatility control funds, which buy stocks when volatility falls, no longer have room to trade stocks. Add exposure.
History seems to be on the side of the pessimists as well. Since 1945, when the S&P 500 rose 20% during the first nine months of the year, it posted a 70% decline in October, according to data compiled by Detailed Investment Research. The index gained 21% this year through September.
The bar has been lowered
However, there is still reason for optimism, namely the lower level of earnings expectations leaving companies with more room to beat expectations.
“Estimates have become a bit optimistic, but are now backing down to more realistic levels,” said Ellen Hazen, chief market strategist at FLPutnam Investment Management. “It will definitely be easier to beat earnings because estimates are lower now.”
In fact, there is plenty of data to suggest that US companies remain fundamentally resilient. A strong earnings cycle should continue to stubbornly offset weak economic signals, tipping the scales of stocks in a positive direction, according to Bloomberg Intelligence. Even distressed small-cap stocks, which have lagged their large-cap counterparts this year, are expected to see improved margins, BI’s Michael Casper writes.
Friday Jobs reportwhich showed an unexpectedly low unemployment rate, allayed some concerns about a soft labor market.
Another factor is the Fed’s easing cycle, which has historically been a boon for US stocks. Since 1971, the S&P 500 has delivered an annual return of 15% during periods when the central bank lowered interest rates, according to data compiled by Bloomberg Intelligence.
These gains were stronger when interest rate cutting cycles occurred in non-recession periods. In those cases, large-cap companies posted an average annual return of 25% compared to 11% when there was a recession, while small-cap companies gained 20% in non-recession periods compared to 17% when there was a recession.
“Unless earnings disappoint significantly, I think the Fed will have a greater impact on markets between now and the end of the year, simply because earnings have been largely consistent,” said Tom Isay, founder and president of Sevens Report Research. “Investors expect that to continue.”