How will reporting season shape the market?

US stocks are about to enter reporting season with key benchmark indexes at all-time highs. Is there further room to rally?

It’s that time again, Wall Street is about to kick-start an important earnings season where the market’s most-important companies detail their quarterly results.

A year after the pandemic ravaged the world, and with life in America for many still resembling a fraction of what it once was, these results will set the tone for how the economic recovery has fared.

Although it is safe to say that the economy itself has changed, inspired by various digitisation trends, investors will be looking for reasons to validate some of the lofty valuations prescribed to high-profile names.

It comes after an extended period where high-growth stocks have been the subject of heavy selling pressure on the back of rising bond yields.

In particular, stocks that make up the tech sector eked out just 2% growth in the first quarter, lagging the likes of energy, which was up 29%, and financials, which rose 15%. That could in turn prove somewhat favourable for markets, however, as it provided an opportunity for investors to recalibrate their expectations for stocks that are trading on high multiples or not yet profitable.

In total, consensus forecasts suggest that S&P 500 earnings will be approximately 25% higher than the same period last year, where the early stages of COVID-19 began to wreak havoc.

If that result transpires, it would be the best quarterly improvement since 2018, when President Trump delivered corporates a shot in the arm via generous tax cuts. Based on the rally that unfolded thereafter, there is little reason to suggest that another blowout reporting season would not be bullish for equities, despite indexes already sitting as high as they are.

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