After a strong start to the year, U.S. stock traders are now turning their attention to various risks, including economic concerns, uncertainties about interest rates, and election-related anxieties. The most crucial factor for the U.S. stock market this week is corporate earnings. The S&P 500 Index has surged by about 20% in 2024, adding over $8 trillion in market value, mainly driven by expectations of Federal Reserve monetary policy easing and robust profit outlooks. However, with analysts lowering expectations for third-quarter earnings, this trend may be shifting.
According to Bloomberg, S&P 500 companies' quarterly earnings are projected to grow by 4.7% year-over-year, down from the 7.9% forecast in July, marking the smallest increase in four quarters. Adam Parker, founder of Trivariate Research, emphasized the importance of corporate earnings reports this season, as they will reveal whether companies are delaying spending, whether demand is slowing, and how geopolitical and macroeconomic uncertainties are affecting customer behavior.
Major companies like Delta Air Lines (DAL, Financial) will release their earnings this week, with JPMorgan Chase (JPM) and Wells Fargo (WFC) following suit. Deutsche Bank's chief U.S. equity and global strategist, Binky Chadha, noted that while earnings seasons are typically positive for the stock market, the strong rebound and above-average positions suggest a more measured market reaction this time.
Investors face multiple obstacles, including economic uncertainties and political tensions, with the U.S. presidential election approaching and Middle Eastern conflicts escalating. Additionally, the Federal Reserve's interest rate cuts bring optimism, but the pace of these cuts remains uncertain. Furthermore, weak seasonal market trends and limited buying power from large institutional investors pose additional challenges.
Despite the hurdles, there are reasons for investor optimism. Lowered earnings expectations mean companies have more room to exceed them. Ellen Hazen, chief market strategist at F.L.Putnam Investment Management, noted that expectations have adjusted to more realistic levels, making it easier for companies to surpass profit expectations. The resilient U.S. corporate sector continues to offset weak economic signals, potentially pushing the stock market toward a positive direction. Recent employment data showing a surprising drop in unemployment has eased some concerns about economic weakness.
Another favorable factor is the Federal Reserve's easing cycle, historically beneficial for U.S. stocks. Since 1971, during Fed rate cuts, the S&P 500 has delivered an annualized return of 15%. This return improves to 25% when cuts occur outside recessions. Tom Essaye, founder of Sevensreport Research, believes that unless corporate earnings are disappointing, the Fed's influence will have a more significant impact on the market from now until year-end.
