The third quarter earnings reporting period will kick off in earnest when some of the nation’s largest banks report quarterly results on Friday.
Wall Street projects earnings to grow 4.7%, which would mark the fifth straight quarter of growth since the same period a year prior. But it would also be the slowest year-over-year growth since the fourth quarter of 2023.
Given stocks have charged higher than normal between reporting periods, Deutsche Bank chief equity strategist Binky Chadha isn’t expecting the typical 2% rise in the S&P 500 (^GSPC) during the first four weeks of earnings reports.
“Earnings seasons are typically positive for equities, but the strong rally and above-average positioning going in argue for a muted market reaction,” Chadha wrote in a note to clients.
Put simply, Chadha and other Wall Street strategists are wary of the growing list of other headlines that are likely to keep grabbing investor attention over the next month. Rising tensions in the Middle East have sent commodity prices soaring. A looming presidential election is expected to add to volatility. And the current trajectory of the economy — and what it means for Federal Reserve interest rate cuts —remains heavily debated.
All of this, plus questions over whether a stimulus-driven rally in China stocks is sustainable, will “continue [to] exaggerate the Macro, and its very uncertain uncertainties, over Micro this earnings season,” according to Evercore ISI’s Julian Emanuel.
Emanuel pointed out in a note to clients on Sunday that earnings seasons in election years typically don’t lead to further upside in the near term for stocks. The past four election cycles dating back to 2008 brought negative returns for the S&P 500 in October, per Emanuel.
“Earnings seasons during election years have seen stocks react less than normal to their sales [and earnings per share] results, an indication of the overhanging Election’s implication for equities,” Emanuel wrote.
Other risks to the market aside, parts of the bull market story have strategists wary of investors hoping for too much out of earnings season. Citi equity strategist Scott Chronert wrote in a note to clients on Monday that the earnings backdrop entering the reporting period is set up for better-than-typical beats compared to Wall Street’s estimates and less-than-usual cuts to forecasts.
The caveat, though, is that investors are already “paying for better than average earnings trends.”
“The bar is high,” Chronert wrote. “Index multiples are all at top decile levels. Our implicit growth framework in aggregate leaves little room for missteps. Both do not necessarily scream ‘sell,’ but historically, have come with volatile market action, to the up and downside.”
Still, strategists believe there could be positive catalysts from this earnings season and takeaways for investors to consider going forward. Entering the reporting period, 72% of companies are expected to grow earnings year over year, the highest proportion since the fourth quarter of 2021 and potentially another sign that “breadth continues to improve,” according to Bank of America Securities US and Canada equity strategist Ohsung Kwon.
To Kwon, this earnings season will be all about the outlook companies provide and what the Fed cutting interest rates could mean for their business.
“Now that the easing cycle has started, what are companies … going to say about any early indications of improvement given the lower rate environment?” Kwon said.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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