After experiencing a hot start in the US stock market this year, traders are beginning to focus on a series of risks, from concerns about the economy to interest rate uncertainty, to anxiety about the US elections. However, perhaps the most important variable in the US stock market this week is: corporate earnings.

$S&P 500 Index (.SPX.US)$In 2024, it surged by about 20%, with a market cap increasing by over $8 trillion. This rise is mainly driven by expectations of monetary policy easing by the FederalReserve and strong profit prospects.

However, as analysts lower their expectations for third-quarter performance, the trend may be shifting. According to Bloomberg data, it is expected that the quarterly earnings of S&P 500 index component companies will grow by 4.7% over the same period last year, lower than the 7.9% forecast on July 12, and the lowest increase in four quarters.

Trivariate Research founder Adam Parker stated: "This time, earnings season will be more important than usual. We need specific data from companies." Parker points out that investors are particularly eager to see whether companies are delaying spending, if demand is slowing down, and if customers are changing behavior due to geopolitical risks and macroeconomic uncertainties. He said: "Due to many events happening in the world, corporate earnings and performance guidance are now more important than ever."

Big companies' financial reports will be released one after another this week.$Delta Air Lines (DAL.US)$The financial report will be released on Thursday, $JPMorgan (JPM.US)$ and $Wells Fargo & Co (WFC.US)$ The financial report will be released on Friday. Deutsche Bank's csi all share investment banking & chief USA stocks and global strategist Binky Chadha said: "Earnings season is typically positive for the stock market, but a strong rebound and above-average positions (to this earnings season) suggest a mild market response."

Obstacles are everywhere.

Investors are currently facing multiple obstacles. With only a month left until the end of the 2024 US presidential election, Democrats' Kamala Harris and Republicans' Donald Trump are in a fierce competition. The Federal Reserve has just begun to lower interest rates, and although people are optimistic about a soft landing for the US economy, the speed at which borrowing costs are being reduced remains a question. Escalating conflicts in the Middle East have reignited concerns about inflation, with WTI crude oil prices rising 9% last week, marking the largest weekly gain since March 2023.

22V Research analyst Dennis DeBusschere stated: "The most important thing is that both revisions and guidance are weak, indicating lingering concerns about the economy and reflecting some seasonal factors of election years. This helps make the reporting season another event to eliminate uncertainty."

Furthermore, the more challenging aspect is that large institutional investors currently have little buying power, with seasonal market trends weak. The positions of systematic funds that track trends are currently biased downwards, and options market positions indicate that traders may not be prepared to buy on dips. Goldman Sachs data shows that even if the market remains stable next month, commodity trading advisors (CTA) may sell US stocks. Volatility control funds that buy stocks when volatility decreases no longer have room to increase exposure.

Historically, pessimism seems to prevail. Data compiled by Bespoke Investment Research shows that since 1945, after the S&P 500 index has risen by 20% in the first nine months of the year, in October, this index has fallen 70% of the time. As of September this year, the index has risen by 21% year-to-date.

Expected revisions, lowering the threshold for corporate profit surprises

Nevertheless, investors still have reasons to remain optimistic, especially as the threshold for profit expectations is lowered, giving companies more room for positive surprises. Ellen Hazen, Chief Market Strategist at F.L. Putnam Investment Management, said: "Expectations were a bit too optimistic before, and now they are falling back to a more realistic level. Exceeding profits will certainly be easier because expectations are now lower."

In fact, there is a large amount of data indicating that American companies fundamentally still have resilience. The continuously strengthening profit cycle is expected to continue to offset stubbornly weak economic signals, pushing the balance of the stock market in a positive direction. Bloomberg strategist Michael Casper wrote that small-cap stocks, even struggling behind the market stocks this year, are expected to see improvements in profitability. Last Friday's employment report revealed, $US - Unemployment Rate (USUER.EC)$unexpectedly declined, easing some concerns about the softness of the job market.

Another factor is the Fed's loose monetary policy, which has always been good news for the US stock market. Data shows that since 1971, during Fed rate cut periods, the S&P 500 index has had an annualized return of 15%. When rate cuts come outside of recession periods, these returns are even stronger. In such cases, the average annualized return for large cap stocks is 25% during non-recession periods and 11% during economic recessions; small cap stocks have an average annualized return of 20% during non-recession periods and 17% during economic recessions.

Sevensreport Research Founder and President Tom Essaye said: "Unless corporate earnings turn out to be very disappointing, I believe that from now until the end of the year, the Fed's impact on the market will be greater, as corporate earnings have been quite stable. Investors expect this situation to continue."

Editor/Emily