Q2 Financial Report Season Kicks Off! Global Stock Market Rally Faces Crucial Test

The curtain has been raised on the second quarter earnings season. As hundreds of companies announce their performance in the coming weeks, the fate of the nearly $10 trillion global stock market rally this year will face a critical moment. According to data compiled by the media, S&P 500 index component companies are expected to see a 9% YoY decline in profits in the second quarter, making it the worst quarter since 2020; the situation in Europe may be even worse, with profits expected to decline by 12% YoY in the second quarter. However, due to low market expectations and some indicators showing that corporate profits will recover next year, strategists have different views on how the market will react.

Evgenia Molotova, Senior Investment Manager at Pictet Asset Management, said, "I doubt whether companies can demonstrate the same level of profit resilience in the second quarter." "Revenue growth and profit stability will be key factors in assessing whether profits can rebound in the second half of this year."

Areas of concern for market observers include the impact of the depreciation of the US dollar on large US exporters, the substance behind the AI boom that has driven the stock market rally this year, and clues to the extent of cost increases and consumer tightening for companies.

Here are four things investors are paying attention to:

1. Influence of large tech stocks

The AI boom has stimulated the tech-heavy Nasdaq 100 index to reach a historic high in the first half of this year. Now, investors will be looking for evidence of the impact of this emerging technology on corporate profits. The performance of major tech companies such as Apple (AAPL.US), Microsoft (MSFT.US), Amazon (AMZN.US), NVIDIA (NVDA.US), and Alphabet (GOOGL.US) will be closely watched.

Aneeka Gupta, Director of Macro Research at WisdomTree, said, "If the enthusiasm for AI fails to be fully reflected in the profits of tech companies, we may experience at least a temporary adjustment in stock prices."

2. Inflationary effects

Signs of cooling inflation have led people to believe that the Federal Reserve may soon stop raising interest rates. However, this news is not optimistic for companies, as labor and other costs continue to rise while companies are striving to further raise prices for customers. US Consumer Demand Weakens

Rob Haworth, Senior Investment Strategist at Bank of America Wealth Management, said, "The overall slowdown in inflation is faster than the slowdown in wages, which may benefit consumers but harm corporate profit margins." "We will closely monitor the interaction between wage growth and price increases to assess whether companies are still under pressure."

3. Weak Consumer Demand

Market participants say they are focused on consumer spending and are paying attention to car sales as well as the travel and hotel industry to assess the health of US companies. Another area of focus will be corporate debt burdens and refinancing plans, especially for companies with weak balance sheets.

Ross Mayfield, Investment Strategy Analyst at Baird, said, "With a strong labor market and excess savings as stimulus, consumers have been supporting the US economy for months. Therefore, any evidence of consumers tightening their belts and reducing spending on goods and services will be crucial."

US consumer spending, adjusted for inflation, has stalled after a surge at the beginning of the year. In addition, there are some early signs from businesses that are not optimistic. Memory chip manufacturer Micron Technology (MU.US) expects a contraction in the personal computer and smartphone markets. German chemical giant BASF (BASFY.US) has significantly lowered its performance expectations for this year, blaming it on weak global industrial output and declining consumer demand.

Michael Wilson, a strategist at Morgan Stanley, is one of the most bearish on Wall Street. He said that the market's forecast for a rapid recovery in corporate profits next year may be too optimistic, and if companies are cautious about their profit prospects, the stock market could easily be sold off.

4. Greater Challenges for Europe

Barclays strategists said that due to weak manufacturing, European companies are expected to see a larger decline in profits than US companies. With the strength of the euro and the Swiss franc, among other currencies, large European exporters also face further headwinds. Swiss watchmaker Swatch Group AG warned that exchange rate fluctuations will impact sales this year.

From April to June this year, the performance of the European Stoxx 600 index, measured in US dollars, lagged behind the S&P 500 index, reflecting the challenges facing Europe. While lower valuations make European stocks attractive to some, others say that the lack of technology stocks in the European stock market could keep its prospects volatile.