As the stock market continues to face pressure, investors are hoping the upcoming earnings season will help reignite the rally that has slowed since the presidential election, the Wall Street Journal reports.
Despite early signs of economic strength, including a strong jobs report, the Federal Reserve’s less aggressive stance on interest rates has raised concerns about the market’s future momentum. Analysts are now placing greater emphasis on corporate earnings growth as a critical factor in sustaining stock performance.
The Dow Jones Industrial Average has experienced a decline of 0.7% since the presidential election, while the Russell 2000 index, which had been expected to benefit from a second Donald Trump presidency, has fallen by 10% since late November. Rising government bond yields have also added to the pressure on stocks, making investors increasingly skeptical about the pace of rate cuts, which are typically favorable for equities.
The Fed’s cautious approach to rate cuts comes after the central bank started lowering interest rates from a two-decade high in late 2024. Analysts suggest that as rates remain relatively elevated, stocks may face more challenges in the coming months. Early 2025 market performance has already been tepid, with the Dow and S&P 500 each down about 1%, while the 10-year Treasury yield reached its highest point since November 2023.
As the Fed’s actions become more predictable, earnings growth has emerged as a vital factor in keeping the market afloat.
“This fourth-quarter earnings season is probably one of the most consequential earnings seasons that we’re going to see in a long time,” said Larry Adam, chief investment officer at Raymond James.
Investors will be closely monitoring quarterly results from major banks such as JPMorgan Chase, Wells Fargo, and Citigroup, as well as asset managers like BlackRock, for insights into the health of the broader economy.
Analysts expect the S&P 500 to report a 12% increase in profits for the fourth quarter compared to the same period last year. While this would be a notable improvement, it’s lower than the 14.5% growth initially anticipated in September. A key factor in the earnings report will be how companies plan to navigate the political and economic landscape under President-elect Trump, including potential challenges related to tariffs, trade policies, and inflation.
Consumer spending has been a major driver of the economy, though recent data shows that higher-income consumers are continuing to spend, while lower-income households are increasingly cutting back on discretionary items. Early earnings reports from companies like Nike, FedEx, and Conagra Brands indicate that businesses are feeling the strain of economic pressures. For example, Conagra’s CEO noted that inflation and a strong U.S. dollar could create ongoing challenges.
Looking ahead, analysts are still optimistic about the potential for earnings growth in 2025, with projections for a 15% increase in corporate profits compared to 2024. However, some strategists caution that achieving these gains could be difficult given the uncertainties surrounding political developments and global economic conditions.
As the market approaches this critical earnings season, valuations are also under scrutiny. The S&P 500 is currently trading at about 22 times its projected earnings for the next 12 months, above its 10-year average of 18.5 times, which means companies will need to deliver strong results to justify their high stock prices.
For the market to maintain its momentum, some strategists believe that earnings growth will need to extend beyond the tech sector, which has driven much of the rally in recent years. The Magnificent Seven—Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla—are expected to report a combined 22% jump in fourth-quarter earnings, significantly outpacing the broader S&P 500.
