The $10 Trillion Stock Market Rally Faces A Crucial Test In Earnings

The global stock market, which has witnessed a nearly $10 trillion rally this year, faces a critical moment as hundreds of companies prepare to report earnings in the coming weeks.

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S&P 500 firms are expected to report a 9% decline in profits for the second quarter, marking the worst season since 2020, according to data compiled by Bloomberg Intelligence. In Europe, the projected slump is even greater at 12%. However, with expectations already low and some indicators suggesting an earnings recovery next year, market strategists hold differing opinions on how the market will react.

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Investors will closely watch several key areas during this earnings season. These include the impact of a weakening dollar on major exporters to the US, the actual implications of the buzz surrounding artificial intelligence on earnings, and insights into how companies are dealing with higher costs and consumer pressures.

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Market watchers are particularly interested in the following factors:

• Big Tech Influence: The excitement around artificial intelligence has propelled the technology-heavy Nasdaq 100 to its best-ever first half. Investors will now seek evidence of the earnings implications of this emerging technology. Aneeka Gupta, Director of Macroeconomic Research at WisdomTree, warns that if the expected enthusiasm for AI fails to materialize in technology companies' earnings, there could be a temporary correction in share prices. Tech giants such as Apple, Microsoft, Amazon.com, Nvidia, and Alphabet are expected to deliver strong earnings growth.

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• Inflation Effect: Cooling inflation has raised hopes that the Federal Reserve may slow its rate hikes. However, for companies, this news is not entirely positive. Despite lower headline inflation, labor and other costs remain elevated, while companies struggle to further increase prices for customers. Rob Haworth, Senior Investment Strategist at US Bank Wealth Management, points out that while slower headline inflation could benefit consumers, it may hurt profit margins. The interaction between wage growth and price inflation will be closely monitored to determine if businesses remain under pressure.

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• Consumer Squeeze: Market participants are particularly interested in the tone surrounding consumer spending and will closely examine auto sales, as well as the travel and hospitality sectors, to gauge the health of Corporate America. Additionally, the focus will be on company debt levels and refinancing plans, especially for those with weaker balance sheets. Evidence of belt-tightening, reduced spending, or shifts towards lower-priced alternatives in consumer behavior will be key indicators. US consumer spending, adjusted for inflation, has stalled after an initial surge this year. Early signs from companies, such as Micron Technology and BASF, have raised concerns about contracting markets and slow demand for consumer products.

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• Choppy European Outlook: Europe's challenges became more apparent in the April-June period when the Stoxx 600 underperformed the S&P 500 in dollar terms. While cheaper valuations may attract some investors to regional stocks, the absence of technology stocks could result in a volatile outlook.

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• China Rebound: China's stock market has lagged behind the global rally due to a weak economic rebound, concerns about the property sector, and rising youth unemployment. Positive reports from the country's automakers are expected as domestic sales and exports gain momentum. However, technology firms may face challenges due to lackluster global chip markets. International firms with exposure to China, especially luxury companies like LVMH and Kering, will also be closely watched for their performance in the Asian market.

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Overall, the upcoming earnings season will play a decisive role in shaping the trajectory of the global stock market, with investors eagerly anticipating the performance and outlook of companies across various sectors.

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