### S&P 500's Stellar Year Faces Trial During Uncertain Earnings Season

As traders navigate a complicated financial landscape, the forthcoming corporate earnings season is set to be a critical test for the S&P 500 Index, which has enjoyed a remarkable 20% rise in 2024, translating to an additional $8 trillion in market value. The surge has primarily been driven by optimism around easing monetary policy and stable profit projections.

However, the outlook is becoming murkier. Analysts have lowered their expectations for third-quarter corporate earnings, now forecasting a 4.7% increase compared to last year's, down from an earlier 7.9% forecast made in mid-July. This adjustment marks the smallest earnings growth projected across four quarters, according to Bloomberg Intelligence.

"This earnings season will carry more weight than usual," remarks Adam Parker, founder of Trivariate Research. "We're in dire need of solid data from corporations." Parker underscores investors' curiosity about whether companies are deferring expenditures, if demand is waning, and if consumer behavior has shifted due to geopolitical and macroeconomic uncertainties.

Investors will get some clarity as major players start reporting this week. Delta Air Lines Inc. is set to release its results on Thursday, followed by JPMorgan Chase & Co. and Wells Fargo & Co. on Friday. Historically, earnings seasons have buoyed equities, but Binky Chadha, Deutsche Bank Securities Inc.'s chief U.S. equity and global strategist, speculates that this time could see a subdued market reaction due to the strong rally thus far and above-average market positioning.

The environment is rife with challenges. The U.S. presidential election, featuring candidates Kamala Harris and Donald Trump, looms just a month away, and the Federal Reserve's recent moves to reduce interest rates have sparked both optimism and caution. Additionally, rising oil prices amid escalating Middle Eastern conflicts could reignite inflation concerns, with West Texas Intermediate crude surging 9% last week — its biggest gain since March 2023.

Dennis DeBusschere of 22V Research notes that the downward revisions in earnings and guidance reflect persistent economic anxieties and potential election-season effects. "This sets the stage for the earnings season to clear some of these uncertainties," he says.

Market dynamics further complicate matters. With institutional investors lacking significant buying power and seasonal market trends looking weak, even a stagnant market could prompt trend-following systematic funds to sell U.S. stocks. Options market data and volatility control funds indicate limited capacity for traders to capitalize on market dips.

Historically, the odds are stacked against optimistic outcomes. Bespoke Investment Research data reveals that since 1945, the S&P 500 has typically declined in October 70% of the time when it gained 20% in the first nine months. The index is up 21% through September this year.

Still, some believe the moderated earnings estimates might actually benefit companies, making it easier for them to surpass expectations. Ellen Hazen from F.L. Putnam Investment Management believes, “It will definitely be easier to beat earnings because estimates are lower now.”

Despite economic concerns, U.S. companies appear to show fundamental resilience, with prospects of a stronger earnings cycle bolstering equities. Michael Casper from Bloomberg Intelligence even suggests improving margins for lagging small-cap stocks.

The recent jobs report, which showed a surprising decline in the unemployment rate, has alleviated some labor market worries. Historically, rate-cutting cycles by the Fed have been advantageous for U.S. equities, with the S&P 500 posting an average annualized return of 15% during such periods.

Tom Essaye, founder of Sevens Report Research, asserts, "Unless earnings are a major disappointment, I think the Fed will be a bigger influence over markets between now and year-end because earnings have been pretty consistent. Investors expect that to continue."