Source: Wall Street See

Currently, the attention of the market is focused on the Federal Reserve, but the news that could really drive the future trend of the US stock market will not be announced until next month.

The Federal Reserve began a rate cut cycle this Wednesday. The US stock market is still maintaining at a high level,$S&P 500 Index (.SPX.US)$It has risen by about 19% since the beginning of the year, and even hit a new all-time high during Tuesday's trading.

Analysis believes that the actual interest rate cut by the Federal Reserve is unlikely to trigger a significant increase in the US stock market, because investors have already priced in the expectation that the Federal Reserve will relax its policy and implement a series of interest rate cuts. This makes investors believe that interest rates will not rise and have confidence in the US economy.

However, there are many concerns about the US stock market. Firstly, the US stock market may have risen too far. The forward P/E ratio of the current S&P 500 index is 21.2, which is the highest level since early 2022. It is well known that early 2022 was the mid-term top of the US stock market. Afterwards, due to the aggressive tightening by the Federal Reserve, the S&P 500 index once fell more than 27% from its peak and bottomed out in October that year.

The current strong performance of the US stock market reflects a combination of economic growth, increased corporate profits, and lower interest rates. This means that everything, from economic data to corporate earnings to interest rates, must unfold perfectly for the US stock market to maintain its current level.

However, what if things don't go perfectly in the future? It is necessary to be vigilant, as the mixed bag of the economy can easily become overheated or too cold:

If the US economy is strong enough to increase corporate profits as expected by the market, inflation may rise again, which will in turn put pressure on interest rates and the US stock market.

On the other hand, disappointing corporate financial reports or concerns about financial reports can also bring problems. If the market expects a 3% decline in earnings for the S&P 500 index, it means that at the current level, the price-to-earnings ratio for the S&P 500 index is 22 times, which is a valuation multiple that has never been reached in many years. A decline in corporate earnings or a downward revision of earnings forecasts will force the S&P 500 index to decline, making the valuation more reasonable.

A downward revision of corporate earnings forecasts is highly likely.

According to data from Trivariate research, the market expects that the total sales growth rate of non-financial companies in the S&P 500 index will be slightly higher than 6% in 2025, which is one percentage point higher than the average level of about 5% since 2005. However, considering that consumers and companies are still tightening their budgets in the face of high interest rates, above-average growth is unlikely to be realized next year.

Surprisingly weak economic data in the United States in recent months also supports the possibility of downward revisions to corporate profit forecasts. According to FactSet data, although recent U.S. economic activity has been disappointing, sales expectations for the S&P 500 index this year and next year have remained nearly unchanged in the past three months.

Based on this, Trivariate pointed out, "We think the above-profit estimate is highly unlikely not to be revised downward."

Of course, companies may try to reduce costs as much as possible, but they also face fixed costs such as depreciation and loan interest. A downward revision in revenue forecasts implies that profit margins will be impacted and earnings forecasts are likely to be affected.

Pay close attention to the third quarter earnings season.

Next month, the U.S. stock market will welcome the earnings season. Although third-quarter corporate performance may look good, company executives may warn of a dim demand outlook. And the adjustment in the U.S. stock market could start from here. October may cause panic in the market.

Alphabet, the parent company of Google, and Meta will announce their financial reports at the end of October, which will provide more clues. Their comments on advertising spending will reveal whether marketers are prepared for stronger or weaker consumer demand. Apple will announce its third-quarter earnings in early November, which will have an impact on a wider range of consumer electronics products, chip manufacturers, and related business chains.

Adam Parker, CEO of Trivariate, said the bottom line is that there is no reason for the US stock market to rise or fall before the earnings season in October. We will have a clearer understanding of the growth trajectory and determine how much to lower expectations.

Editor / jayden