Wall Street Looks to Corporate Earnings for Market Rally

With interest rate cuts on the backburner, Wall Street is looking to corporate earnings to continue powering the 2024 stock market rally. Analysts polled by FactSet expect second-quarter earnings of S&P 500 companies to grow about 8.7% on average from the prior year. That would mark the fourth-straight quarter of annual earnings growth for the benchmark index. Strong corporate earnings have helped the S&P 500 gain a whopping 16% and notch repeated record high closes this year.

That's despite sticky inflation during the first quarter pushing interest rate expectations further out. While data in recent months has signaled that inflation is cooling again, the Federal Reserve penciled in just one interest rate cut for 2024 at its June policy meeting. Investors are now forecasting up to three cuts, but at the beginning of the year, they were projecting up to six or seven. Federal Reserve Chair Jerome Powell said Tuesday at a central bank policy forum in Sintra, Portugal, that prices are back on a 'disinflationary path.' But he maintained that the central bank needs to see more data before easing rates. Since the Fed isn't likely to cut rates anytime soon, the onus is on strong corporate earnings to continue driving the market rally.

High interest rates tend to weigh on stocks, since they increase corporate borrowing costs and make virtually risk-free government bonds more attractive. 'Earnings growth will be key to holding, or potentially building on these gains,' wrote Jeffrey Buchbinder, chief equity strategist at LPL Financial, in a Monday note. Earnings season kicks off July 12 when big banks including JPMorgan Chase, Wells Fargo and Citigroup report results. Investors will watch for clues about the health of the consumer. Recent economic data and warnings from retailers have signaled that lower- and middle-income Americans are tightening their purse strings.

The June jobs report, due Friday, will give investors insight into the strength of the labor market. Preliminary data Tuesday revealed that job openings unexpectedly jumped higher to 8.14 million in May, suggesting the labor market remains resilient in the face of sky-high rates. Investors will also keep close tabs on results from mega-cap tech stocks, whose blockbuster returns account for much of the market's gains this year. Shares of Nvidia, the leader of the pack, are up 159% in 2024 after reaching a $3 trillion market cap for the first time in June. Microsoft shares are up 23% and Meta Platforms shares have jumped 44%.

Shares of Amazon, which joined the $2 trillion club last month, are up 30%. Wall Street is looking for signs that these companies' balance sheets match their lofty valuations. The S&P 500's total return for the first half of the year, including dividends, is 15.3%, according to S&P Dow Jones Indices data. Without Nvidia's gains, the index's total return is 10.7%. 'High valuations will also need to be defended from rising uncertainty around monetary and fiscal policy, domestic and international elections and geopolitical conflict,' wrote Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in a Monday note.