Why this earnings season will lead to a 'muted market reaction'

The third-quarter earnings reporting period will begin in earnest when some of the country's largest banks report their quarterly results on Friday.

Wall Street expects earnings to grow 4.7%, marking the fifth straight quarter of growth since the same period a year earlier. But it will also be the slowest year-on-year growth since the fourth quarter of 2023.

With stock prices higher than usual between reporting periods, Pinky Chadha, chief equity strategist at Deutsche Bank, doesn't expect a typical 2% rise in the S&P 500 (^GSPC) during the first four weeks of earnings reports.

“Earnings seasons are usually positive for stocks, but strong gains and above-average positions lead to a weak market reaction,” Chadha wrote in a note to clients.

Simply put, Chadha and other Wall Street strategists are concerned about the growing list of other headlines that are likely to continue to capture investors' attention over the next month. The escalation of tensions in the Middle East led to a rise in commodity prices. The impending presidential election is expected to increase volatility. The current path of the economy — and what it means for the Fed's interest rate cuts — is still hotly debated.

All of this, plus questions about whether the stimulus-driven rally in Chinese stocks is sustainable, will “continue.” [to] “Overhyped, highly uncertain, on Micro this earnings season,” says Julian Emanuel of Evercore ISI.

Earnings seasons in election years don't typically lead to further near-term upside for stocks, Emanuel noted in a note to clients on Sunday. The past four election cycles dating back to 2008 have brought negative returns for the S&P 500 in October, according to Emanuel.

“Earnings seasons during election years have seen stocks react less than usual to their sales [and earnings per share] “The results are a sign of the election’s impact on stocks,” Emanuel wrote.

Regardless of the other risks facing the market, parts of the bull market story make strategists wary of investors hoping to make too much outside of earnings season. Scott Krohnert, equity strategist at Citi, wrote in a note to clients on Monday that the earnings backdrop entering the reporting period is set for better-than-usual results compared to Wall Street estimates and smaller-than-usual forecast cuts.

But the caveat is that investors are “already paying for better-than-average earnings trends.”

“The bar is high,” Kronert wrote. “The index multiples are all at high decile levels. Our implied growth framework overall leaves little room for error. Both don't necessarily scream 'sell,' but historically, they have come with volatile market action, both to the upside and to the downside.”

The story continues

However, strategists believe there may be positive catalysts from this earnings season and tips for investors to consider moving forward. Entering the reporting period, 72% of companies are expected to grow earnings year-over-year, the highest since the fourth quarter of 2021 and perhaps another sign that “breadth continues to improve,” according to an equity strategist at Bank of America Securities. In the United States and Canada. Osung Kwon.

For Kwon, this earnings season will revolve around the forecasts companies provide and what the Fed's rate cut might mean for their business.

“Now that the monetary easing cycle has begun, what will companies say…about any early signs of improvement in the low interest rate environment?” Kwon said.

Josh Schaeffer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.

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