US Stock Market Faces Reality Check in High-Bar Earning Season

New York: The US stock market is gearing up for a big test. After a strong rally, companies are about to share their quarterly earnings. This will help us see if stock prices have gotten ahead of reality.

Last Friday, the S&P 500 took a hit, dropping 1.5%. This was its biggest fall since December. The job market is still strong, which makes folks think the Federal Reserve might hold off on cutting interest rates for a while.

Investors have set high expectations. They’re looking for a 7.3% increase in earnings for S&P 500 companies compared to last year. That’s a big ask and could shake things up if companies don’t meet these targets.

With the S&P 500 priced for a 23% growth in earnings per share over the next year, the stakes are high. Analysts predict a 13% growth in 2025, so companies really need to step up their game.

Michael Casper, a senior equity strategist, pointed out that we haven’t seen such high expectations since 2018. It’s going to be tougher for companies to beat profit estimates this year.

The earnings season kicks off this Wednesday with major players like JPMorgan Chase and Citigroup reporting. Other big names like Netflix and Procter & Gamble will follow next week.

One thing to watch is whether earnings growth will spread beyond just the big tech companies. If companies outside of tech can show growth, it could help boost the market.

While tech will still be a major player, there’s a sense that growth might slow down for the biggest firms. They’re expected to see a 22% profit increase, down from 34% last year.

Investors are also curious about how new policies from President-elect Trump will affect businesses. While some plans could shake up global trade, the market seems more focused on the potential benefits.

However, the tax cuts being discussed might not be as impactful as those from 2017, which adds another challenge for meeting growth expectations.

Another factor is the dollar’s rise. While it could lower import costs, it might hurt multinational companies by reducing demand for exports.

Traders are keeping an eye on earnings-revision momentum, which shows how analysts are adjusting their profit expectations. It’s been trending down, which could signal a shift in sentiment.

Some sectors are expected to see strong profit growth, while energy is forecasted to struggle. Analysts are also watching operating margins closely as inflation eases.

Across the pond, European companies are facing tougher times. With slow growth at home and in China, their earnings are expected to lag behind the US.

Overall, the outlook for European stocks remains challenging, especially for industries reliant on exports.