The S&P 500 Index, riding a wave of optimism fueled by hopes of a relaxed monetary policy and robust profit forecasts, has enjoyed an astounding $8 trillion rally this year. But this remarkable surge, which saw the index climb over 20% in 2024, is about to face a crucial test: earnings season.
As companies begin releasing their third-quarter results, investors are keenly focused on deciphering the health of the economy and the future direction of the market. While the S&P 500’s performance has been impressive, analysts are now tempering their expectations for corporate earnings. According to Bloomberg Intelligence, companies are anticipated to report a 4.7% increase in quarterly earnings year-over-year, a notable decline from the 7.9% projections made back in July.
This shift in expectations stems from concerns about slowing demand, rising geopolitical risks, and the potential for companies to curtail spending. Investors are eager to understand how businesses are navigating these challenges and how consumers are reacting to the uncertain macroeconomic environment.
This week, major players like Delta Air Lines, JPMorgan Chase, and Wells Fargo will release their results, providing valuable insights into the broader economic landscape. While the market has been buoyant leading into this earnings season, some analysts are expecting a more subdued reaction.
Binky Chadha, chief US equity and global strategist at Deutsche Bank Securities Inc., believes that the market’s optimism might have been too optimistic, leading to a pullback towards more realistic expectations. Ellen Hazen, chief market strategist at F.L. Putnam Investment Management, echoes this sentiment, stating that the lowered bar for earnings projections could give companies a greater opportunity to outperform.
Despite the current economic challenges, which include the upcoming US presidential election, the Federal Reserve’s decision on interest rates, and the escalating conflict in the Middle East, there’s a glimmer of hope.
Bloomberg Intelligence suggests that a robust earnings cycle could potentially offset weak economic signals, potentially tipping the scales in favor of equities. Ultimately, the coming weeks will be crucial for determining the sustainability of the S&P 500’s remarkable rally.
