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High expectations for US corporate earnings mean that a flood of earnings reports due in the next two weeks will play an important role in shaping the direction of Wall Street stocks, investors said, after a poor start to 2025.
The IS & P 500 had the best week since the November elections in the US last week, helped by strong numbers from major banks, pushing the index into the black in January.
But investors say a strong show is needed for many domestic names – worth $ 25tn combined – due to report before the end of January, if the market will exceed the record high reached last month.
Analysts are predicting the best quarterly results in three years, with S&P 500 companies' profits expected to rise 11.4 percent year over year, according to FactSet.
Reference up 23 percent from last year such as demand for stocks related to artificial intelligence enabled technology companies. That put the S&P at a forward price/earnings ratio of 21 times, according to data from LSEG.
“The market can't count on many more extensions to raise returns because they are (already) extended in 2024,” said Jurrien Timmer, global head of Fidelity Investments.
“That puts more pressure on earnings to be the main contributor to market returns,” he added, pointing to jitters about higher interest rates.
On average, a bad January for stocks leads to an average return of 2.5 percent for the year, according to Barclays strategists. An opening month with profits of at least 1.5 percent, however, usually leads to an annual return of more than 11 percent.
After achieving a series of record highs in 2024, stocks have stumbled in recent weeks, plagued by worries about the potential for higher interest rates to hurt economic growth and uncertainty about what actions the incoming Trump administration might take.
Companies including Netflix, GE and consumer products group Procter & Gamble are among those set to report this week. Tech giants including Amazon, Microsoft, Facebook parent Meta and Tesla are expected next week.
High growth is still expected to come from the technology sector, incl called the Magnificent Sevenbut investors are looking for signs of improved profitability among other sectors in the hope that this will reduce the dependence of the S & P 500 on stock stocks.
The income of the Magnificent Seven – Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia – is expected to increase by 21 percent this year, down from a rate of 33 percent in -2024, according to FactSet. Income growth in the other 493 stocks in the index is expected to take 13 percent, up from 4 percent.
Market participants will look closely at the management's thoughts on the policy agenda of incoming President Donald Trump, and the market's gains since his victory in the November election based in part on the hope of reducing business regulation and reducing taxes.
Concerns about Trump's actions could also take the shine off strong wage reform, if the president acts early on some of his tax threats, which could hurt the international outlook.
It is estimated that 30 percent of the revenue of S&P 500 companies is generated outside the US, and every 10 percent increase in the dollar translates into a 3 percent increase in the company's average earnings per share.
“The difference in growth rates between the Magnificent Seven and the rest of the market is the main thing, but I'm very interested in the direction of the companies in relation to the business report since the election,” said Kevin Gordon, a senior investment expert. Charles Schwab.
“We have seen a mismatch between the spirits of foam animals and the disappointing numbers in the last quarter. I'm not going to hang my hat on the idea that repeal (under Trump) is going to be a big growth story,” he added.
Additional reporting by Ray Douglas