Stock Market Jitters: Traders Brace for Corporate Earnings and Political Developments

Stock Market Jitters: Traders Brace for Earnings and Politics

Stock market jitters persisted as traders anticipated the start of the corporate earnings season, closely monitoring the US presidential race and hints regarding the Federal Reserve’s next actions. If the S&P 500 ends higher, it will mark its 35th record this year. Major US banks will commence the second-quarter reporting season on Friday, with analysts’ upgrades to profit estimates outnumbering downgrades, according to a Citi index. Meanwhile, expectations for 12-month forward earnings are at an all-time high, Bloomberg data shows.

Optimistic Projections and Economic Resilience

John Stoltzfus at Oppenheimer Asset Management stated that a strong earnings outlook and a resilient economy could drive even higher valuations. He raised his year-end target for the S&P 500 to 5,900 points, implying a 6% increase from the previous close.

He noted that S&P 500 earnings results over the past three quarters and economic data underline resilience. This outlook is bolstered by the Fed’s mandate-sensitive monetary policy. These factors form the core of our bullish stance on stocks.

The S&P 500 hovered near 5,570. Chipmakers led gains, with Nvidia Corp. rallying after UBS Group AG raised its target, citing “exceedingly robust” demand. Taiwan Semiconductor Manufacturing Co. briefly surpassed $1 trillion in market capitalization. The Russell 2000 index of small caps added 1%. Treasury 10-year yields were little changed at 4.28%.

Market optimism fueled by tech gains, Nvidia’s surge, and stable yields reflects strong economic resilience, according to Barron’s Print Edition.

Political Landscape and Investor Sentiment

Investors find the lack of a clear winner in the French elections relieving, speculating that no major policy changes will likely occur amid government deadlock. President Joe Biden assured fellow Democrats he plans to stay in the 2024 presidential race.

“S&P 500 earnings growth will likely continue for the next year at a respectable pace,” said Nicholas Colas at DataTrek. “Moreover, we should broaden those improvements across various sectors rather than concentrating them in just a few tech-heavy areas. All this adds up to continued strength in US large caps.”

According to Scott Rubner of Goldman Sachs Group Inc., US stocks face a tough two-week period from early August. Passive investors withdrawing funds may dampen returns, and disappointing corporate earnings could compel systematic funds to sell stocks.

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Market Risks and High Expectations

Rubner observed that high expectations for second-quarter earnings no longer benefit the market, as they have already been priced in. Systematic funds have substantial positions, so any volatility spike or misses from popular stocks could trigger non-fundamental selling to mitigate risk.

For the past two years, a small group of companies have contributed to the majority of the gauge’s return: The S&P 500 has gained roughly 55% since the lows of October 2022 — but 58% of that advance has come from just the top 10 stocks in the benchmark, according to Bloomberg data.

Federal Reserve in Focus

Jerome Powell faces mounting pressure this week from lawmakers eager for rate cuts and critical of the Fed’s new plan to increase Wall Street lenders’ capital requirements. He’ll testify on Capitol Hill Tuesday and Wednesday for his semiannual testimony.

This week, investors will focus on Powell’s testimony and Thursday’s release of June consumer price index data. Analysts expect the core CPI, excluding food and energy costs, to show the smallest consecutive gains since August. This pace is deemed more acceptable by Fed officials.

“While the CPI release will be key, we will be looking for signs from Powell that the Fed is edging closer to a decision to cash in its chips and move in September provided ongoing inflation news broadly confirms that the run-rate has stepped back down,” said Krishna Guha at Evercore.

Global Economic Impact

If US inflation moderates without collateral damage to the economy, the resulting Fed easing cycle could be a tailwind for risk assets, according to Jason Pride and Michael Reynolds at Glenmede.

“Synchronized global easing cycles have historically been a bullish signal for equities in the short-to-medium term,” they noted.

According to Glenmede, the S&P 500 shows 9.9% forward returns after 40–60% of global central banks ease policy. If easing reaches 80–100%, returns increase to 18.7%, indicating potential equity benefits with more central bank participation.

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