Hopes for avoiding a recession are increasing on Wall Street as investors look to the upcoming earnings season for confirmation of this optimism. Companies in the S&P 500 are expected to have seen a 3.7% rise in profits in the third quarter, marking the fifth consecutive quarter of earnings growth. The S&P 500 index has seen a 21% gain for the year as artificial intelligence enthusiasm and rising confidence in a soft landing scenario for the US economy drive stocks higher.
Recent data indicates that the US economy is still strong, with job gains in September surpassing expectations and the GDP growing at a solid 3% annual rate in the second quarter. Early updates in the quarterly earnings season have shown a mixed view of the US economy, with companies like PepsiCo beating profit predictions but missing revenue expectations, Conagra Brands reporting a decrease in sales, and General Motors raising its full-year earnings guidance.
In the upcoming earnings season, investors will be closely watching for clues about the economy’s health. The Federal Reserve’s recent interest rate cuts are expected to have a positive impact on the economy by lowering borrowing costs, but it will take some time for these effects to be felt. Inflation data has also shown signs of easing closer to the Fed’s 2% target, with concerns about the impact of escalating conflicts in the Middle East on oil prices and inflation.
Tech companies, which have played a significant role in powering this year’s bull market, are expected to report strong earnings growth in the upcoming season. The information technology sector, which includes companies like Apple and Nvidia, is projected to see a 15% growth in earnings from the prior year. Communication services, which contains Meta Platforms and Alphabet, is also expected to log a 9.9% jump in profits.
Investors are not only focusing on tech companies but are also looking at other areas of the market for investment opportunities. The stock rally in 2024 has broadened into more neglected areas such as small-caps, with small-caps and value stocks seen as cheaper and more attractive bets compared to their large-cap counterparts. As a result, stock rotation is expected to continue as investors seek out opportunities beyond the tech sector.
Overall, investors are anticipating a successful earnings season that will provide insight into the health of the US economy and support hopes of avoiding a recession. The next few months will be pivotal for the Federal Reserve, economy, and stock market as the effects of recent interest rate cuts are realized and inflation trends continue to evolve. With a mixed view of the economy so far, investors are looking to earnings reports and economic data to guide their future investment decisions.
