Some of the largest banks in the USA will release quarterly results on Friday, marking the official start of the third-quarter earnings season. Wall Street expects earnings to grow by 4.7%, which would be the fifth consecutive quarter of growth since the same period last year, but the slowest year-on-year growth since the fourth quarter of 2023.

Given that stocks have outperformed at abnormal levels between earnings seasons, Binky Chadha, Chief Stock Strategist at Deutsche Bank, does not expect the s&p 500 index to exhibit the typical 2% increase in the first four weeks after earnings announcements.

Chadha wrote in a report to clients: "Earnings season is usually favorable for the stock market, but the strong rebound and above-average positions suggest that market reactions will be mild."

In short, Chadha and other Wall Street strategists express concerns about numerous other headlines that are likely to attract investor attention over the next month: escalating tensions in the Middle East that could lead to soaring csi commodity equity index prices; the upcoming presidential election expected to increase market volatility; the current trajectory of the economy and the significant controversy regarding what this means for federal reserve interest rate cuts.

According to Julian Emanuel of Evercore ISI, all of these factors will 'continue to accentuate macro over micro factors' in this earnings season.

Emanuel pointed out in a report to clients last Sunday that in election years, earnings season typically does not result in further short-term stock increases. Emanuel stated that in the last four election cycles since 2008, the s&p 500 index has seen negative returns in October.

Emanuel wrote: 'In election years, stocks react less than usual to sales (and eps) results during earnings season, indicating a negative impact of elections on the stock market.'

In addition to other risks in the market, certain parts of the bullish narrative make strategists worry that investors have overly high expectations for earnings season. Citigroup stock strategist Scott Chronert wrote in a report to clients on Monday that the earnings backdrop going into the reporting season has already set the stage for better-than-expected earnings, with earnings surpassing Wall Street's expectations and fewer cuts in forecasts than usual.

However, it is worth noting that investors have been 'buying into an above-average earnings trend'.

Nevertheless, strategists believe that this earnings season could see positive catalysts, allowing investors to draw lessons from it. Bank of America Securities' U.S. and Canada stock strategist Ohsung Kwon stated that going into the reporting season, it is expected that 72% of companies' earnings will increase compared to the same period last year, the highest proportion since the fourth quarter of 2021, possibly indicating a 'continuing breadth improvement'.

For Kwon, this earnings season will depend entirely on the outlook provided by companies and the potential impact of Fed rate cuts on their business. Kwon said:

"Now that the rate-cutting cycle has begun, how will companies comment on any early signs of improvement in a low-interest-rate environment?"

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