The S&P 500 Index has had a remarkable performance in 2024, soaring by approximately 20% and adding over $8 trillion in market capitalizationThis impressive increase can be attributed mainly to the easing of monetary policy expectations and a strong outlook for corporate profitsHowever, as the stock market enjoyed a hot start this year, traders began to shift their attention to a variety of risksThese included concerns about the economy, uncertainty surrounding interest rates, and anxiety related to upcoming elections.

One of the key factors currently influencing the direction of U.Sstock markets is the impending third-quarter earnings seasonThe results and guidance from major U.Scompanies will be closely watched, with firms such as JPMorgan Chase, Wells Fargo, and BlackRock all set to release their earnings reportsThe performance of these corporate titans will provide substantial clues about the financial health of their sectors and the broader market.

Analysts generally anticipate that S&P 500 constituents will experience a modest profit growth of around 4% year-over-year for the third quarter

This figure is significantly lower than the 11% annual growth rate seen in the second quarter, marking the most substantial slowdown since the first quarter of 2022. As earnings expectations decrease, stocks of companies that have successfully navigated challenges such as rising interest rates, increasing energy costs, and disruptions in global supply chains may see greater returns, particularly in high-interest-rate-sensitive industries.

Bloomberg Intelligence notes that the ongoing strengthening of the earnings cycle should continue to offset persistently weak economic signals, pushing the balance of the stock market towards a positive directionEven small-cap stocks, which have struggled compared to large-cap peers this year, are expected to improve their profit margins as the earnings cycle continues to evolve.

Data compiled by Bloomberg suggests that third-quarter profits for S&P 500 companies could rise by about 4.7% compared to the previous year

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However, this growth is lower than the 7.9% anticipated back in mid-July and represents the smallest increase in four quartersThis decrease in expected corporate profits raises concerns among investors about the sustainability of the current market rally.

Following unexpectedly strong non-farm payroll reports and expectations of significant interest rate cuts by the Federal Reserve, market optimism surrounding an economic soft landing has resurfacedData compiled by Bloomberg indicates that the S&P 500 has historically delivered an annualized return of 15% during periods of monetary easing since 1971. Interestingly, the returns are even more robust when such easing occurs during non-recessionary periods, with large-cap stocks generating an average annualized return of 25% in these scenarios, versus just 11% during recessionsIn the same context, small-cap stocks typically see average annualized returns of 20% in non-recessions, compared to 17% during economic downturns.

Bank of America has conducted extensive research indicating that the third quarter is likely to present stock pickers with a golden opportunity

During this crucial phase, the performance of S&P 500 components is expected to have a profound impact on the index’s overall returnEmploying their expertise in market dynamics, Bank of America’s equity and quantitative strategists have analyzed the pricing situation in the options marketThey found that the implied volatility for individual stocks around earnings announcements is at its highest since 2021, indicating a significant difference in expectations for third-quarter performance among market participants, leading to broader potential volatility.

Research by Bespoke Investment Group highlights that since 1945, movements in the S&P 500 have garnered substantial market attention, which remains true todayThe index has demonstrated robust growth, having increased by 20% in the first nine months of the yearNonetheless, there is apprehension surrounding October — historically a month where the index has fallen 70% of the time

As of September 2023, the S&P 500 had gained 21%, but by October 1st, it had edged up another 0.5%, marking a new highYet, the traditional "October slump" continues to loom over market sentiment, with market players eager to see whether earnings reports can quench concerns and revise this unfavorable perception.

As the earnings season approaches, investors are particularly eager to discover whether companies are cutting back on expenditures, if demand is softening, and whether customer behavior has shifted due to geopolitical risks and macroeconomic uncertaintyThe response to these inquiries will be crucial in shaping market sentiment going forward.

Lowered earnings expectations could provide companies with increased leeway to surpass forecasts, potentially preserving market confidenceStill, if results are disappointing or fail to meet even modest expectations, the prospect of additional downside risk looms for the stock market