Title: US Equities Face High Expectations for Profit Growth to Sustain Stock Market Rally
As US companies gear up to report their second-quarter earnings, Wall Street analysts are eagerly anticipating the biggest rise in profits in over two years. The challenge is set for these companies to meet or exceed expectations in order to sustain the recent record highs seen in the stock market.
According to analysts’ forecasts compiled by FactSet, S&P 500 stocks are expected to report nearly 9% year-on-year earnings growth for the three months ending in June, marking the largest quarterly increase since early 2022. The index has already surged approximately 16% in 2024, largely driven by a few massive technology companies.
However, with stock valuations at their highest level in nearly three years, there is little room for disappointment if earnings fall short of projections. Liz Ann Sonders, chief investment strategist at Charles Schwab, emphasized the need for earnings to catch up to current valuations to maintain market momentum.
The upcoming earnings season will kick off with major financial institutions such as JPMorgan Chase and Citigroup reporting on July 12, followed by tech giants like Microsoft, Google parent Alphabet, and Tesla on July 23. While analysts typically lower their earnings forecasts as results season approaches, this quarter has seen minimal adjustments, indicating high expectations for corporate performance.
The tech sector, which has been a key driver of market gains, is expected to see a slowdown in profit growth, with analysts predicting a 30% year-on-year increase in the second quarter, down from 38% in the previous quarter. As a result, analysts are looking to other sectors, such as energy and materials, to provide a boost to overall earnings growth.
Despite the optimism surrounding earnings, some market experts caution that the market may be priced for perfection, with high valuations leaving little room for error. The potential impact of daily fluctuations in tech giants like Nvidia and Microsoft on overall market sentiment also remains a concern.
As investors await the upcoming earnings reports, the focus will be on whether US companies can deliver the profit growth needed to sustain the current stock market rally. With valuations at elevated levels, the pressure is on for companies to meet or exceed expectations to justify the recent market gains.
