S&P’s $8 Trillion Rally Will Be Tested by Tricky Earnings Season

(Bloomberg) -- Traders are staring down a series of risks after the stock market’s torrid start to the year, from economic fear, to interest rate uncertainty, to election angst. But perhaps the most important variable for whether equities can keep rolling returns to the spotlight this week: corporate earnings.

Most Read from Bloomberg

• Singapore Ends 181 Years of Horse Racing to Make Way for Homes

• What Do US Vehicle Regulators Have Against Tiny Cars?

• For a Master of Brutalist Provocations, a Modest Museum Appraisal

• Mexico City Restricts Airbnb Rentals to Curb ‘Gentrification’

• NYC Schools Reverse Course on Cell-Phone Ban After Parents Balk

The S&P 500 Index has soared roughly 20% in 2024, adding more than $8 trillion to its market capitalization. The gains have largely been driven by expectations of easing monetary policy and resilient profit outlooks.

But the tide may be turning as analysts slice their expectations for third-quarter results. Companies in the S&P 500 are expected to report a 4.7% increase in quarterly earnings from a year ago, according to data compiled by Bloomberg Intelligence. That’s down from projections of 7.9% on July 12, and it would represent the weakest increase in four quarters, BI data show.

“The earnings season will be more important than normal this time,” said Adam Parker, founder of Trivariate Research. “We need concrete data from corporates.“

In particular, investors are eager to see if companies are postponing spending, if demand has slowed, and if customers are behaving differently due to geopolitical risk and macro uncertainty, Parker said. “It is exactly because there is a lot going on in the world that corporate earnings and guidance will particularly matter now,” he said.

Reports from major companies start arriving this week, with results from Delta Air Lines Inc. due Thursday and JPMorgan Chase & Co. and Wells Fargo & Co. scheduled for Friday.

“Earnings seasons are typically positive for equities,” said Binky Chadha, chief US equity and global Strategist at Deutsche Bank Securities Inc. “But the strong rally and above-average positioning going in (to this earnings season) argue for a muted market reaction.”

Obstacles Abound

The obstacles facing investors right now are no secret. The US presidential election is just a month away with Democrat Kamala Harris and Republican Donald Trump in a tight, fierce race. The Federal Reserve has just started lowering interest rates, and while there’s optimism about an economic soft-landing, questions remain about how fast central bankers will reduce borrowing costs. And a deepening conflict in the Middle East is raising concerns about inflation heating up again, with the price of West Texas Intermediate oil rising 9% last week, the biggest weekly gain March 2023.