High expectations present a tough earnings test for Wall Street

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High expectations for US corporate profits mean that more earnings reports coming in the next two weeks will play a very important role in setting the course for Wall Street stocks, investors say. after starting to move in 2025.

The S&P 500 had its best week since the November US election last week, helped by strong numbers from the biggest banks, pushing the index back into the black for January.

But investors say a strong showing is needed from more household names – worth a combined $25tn – due to report before the end of January, if the market is to surpass the record high it hit this month. ago.

Analysts are predicting their best quarterly results in three years, and the average profit of S&P 500 companies is expected to rise 11.4 percent annually, according to FactSet.

Index increased by 23 percent last year such as the demand for stocks related to artificial intelligence that are profitable for technology companies. That put the S&P at a forward price/earnings ratio of 21 times, according to data from LSEG.

“The market cannot count on many expansions to increase profits because of how (they) have already expanded in 2024,” said Jurrien Timmer, global head of Fidelity Investments.

“That puts more of a burden on earnings to contribute to the market’s return,” he added, also pointing to frustration with higher interest rates.

On average, a bad January for stocks leads to an average return of 2.5 percent for the whole year, according to Barclays strategists. An opening month with a gain of at least 1.5 percent, however, tends to produce annual gains of more than 11 percent.

After racking up a series of record highs through 2024, stocks have fallen in recent weeks, weighed down by concerns about the potential for higher interest rates to hurt economic growth and uncertainty about future actions. possible front of the incoming Trump administration.

Companies including Netflix, GE and consumer products group Procter & Gamble are among those due to report this week. Tech giants including Amazon, Microsoft, Facebook parent Meta and Tesla should come next week.

The highest growth is still expected from the technology sector, including the so-called Magnificent Sevenbut investors are also looking for signs of improving profitability among other sectors in the hope that this will soften the S&P 500’s confidence in a few stocks.

Earnings for the Big Seven – Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia – are predicted to rise 21 percent this year, down from a 33 percent rate in 2024, according to FactSet. Earnings growth for the other 493 stocks in the index is expected to rise to 13 percent, up from 4 percent.

Market participants will also be closely watching management’s thoughts on incoming President Donald Trump’s policy, with the market’s gains from his November election victory reliant in part on hopes of deregulation. and tax cuts.

Concerns about Trump’s actions also have the potential to overshadow even strong wage reforms, if the president moves too quickly on some of his tax threats, which could damage the outlook of many nations.

About 30 percent of revenue for S&P 500 companies is generated outside the US, and every 10 percent increase in the dollar translates into a 3 percent hit to earnings. average of each part.

“The difference in growth rates between the Magnificent Seven and the rest of the market is important, but I am more interested in the direction of the companies related to the business report from the election,” said Kevin Gordon, a senior investment expert. Charles Schwab.

“We’ve seen a mismatch between inflation and potentially disappointing numbers in the last quarter. I wouldn’t hang my hat on the idea that deregulation (under Trump) is going to be a big story. big,” he added.

Additional reporting by Ray Douglas