US corporate profits have improved, but the bull market trend still depends on the "mood" of the Federal Reserve.

The US stock market is approaching historical highs, and the profit prospects of American companies are becoming increasingly optimistic. Currently, investors are watching to see if the Federal Reserve will disrupt the bullish market.

Zhongtong Finance APP noticed that there are signs that inflation pressures are finally starting to recede, and the historically bullish situation is beginning to emerge. However, the S&P 500 index is currently only 5.4% below its historical high. This backdrop increases the risk of this week's crucial Federal Reserve meeting, as economists continue to debate whether a recession will occur this year.

Of course, the danger lies in the fact that labor market elasticity prompts policymakers to signal further tightening after the expected rate hike this week, endangering Wall Street's profit expectations, especially for key technology stocks that have risen this year.

Ed Clissold, Chief US Strategist at Ned Davis Research, said, "The risk lies in whether the Federal Reserve feels the need to accelerate the tightening cycle again." "If so, it could ultimately become the policy mistake that everyone is looking for."

Investors are preparing for the big trades this week from two perspectives. About 170 companies, accounting for about 40% of the market value of the S&P 500 index, plan to announce their performance, including leading companies such as Microsoft (MSFT.US), Meta platform, and Google's parent company Alphabet.

However, Wednesday could be decisive as the Federal Reserve is expected to raise the benchmark interest rate to a 22-year high, followed by Chairman Powell's press conference. The Fed chairman may lean towards the possibility of another rate hike, which could put the brakes on economic growth and disrupt the bull market.

Brian Frank, portfolio manager at Frank Value Fund, said, "I have taken a defensive position because I still believe we are heading towards a recession." He advises investors to buy energy and utility stocks that have been hit hard. "Economic recessions often catch everyone off guard because people initially deny the recession and call it a 'soft landing,' and then we end up with an economic recession."

However, according to Dennis DeBusschere, founder of 22V Research, signs of a strong real estate market refute the bearish view.

In July, US homebuilder confidence rose to its highest level in 13 months. This is good news for investors waiting for the release of the initial estimate of second-quarter domestic gross domestic product (GDP) this week.

DeBusschere wrote in a report, "The interest rate-sensitive real estate industry has stabilized and is supporting GDP growth (given the huge drag on the real estate market last year)." "If the most interest rate-sensitive industries are improving, it is difficult to prove the bearish view based on the lagging effects of tightening policies."

A survey shows that the GDP report is expected to show a 1.8% annual growth rate for the last quarter, compared to the previous data of 2%.

This Friday, traders will closely monitor the Employment Cost Index and the Personal Consumption Expenditures Price Index. The Employment Cost Index is a broad measure of wages and benefits, while the Personal Consumption Expenditures Price Index is a favored inflation indicator by the Federal Reserve. This will help determine whether the Fed will lean towards raising interest rates again at the September meeting.

Currently, investors can be certain that the earnings outlook is continuously improving. Data shows that despite the projected third consecutive quarterly decline in profits for S&P 500 constituent companies, earnings are improving when excluding the energy sector. The energy sector is the only industry within the S&P 500 constituents that has shown strong performance in 2022. BI data indicates that profit growth, excluding energy, is expected to recover in the second half of this year.

Gina Martin Adams, Chief Equity Strategist at BI, said, "Corporate earnings have significantly improved compared to what the stock market reflected at the end of last year." "Using the economy as a forecasting tool for the stock market has proven to be a very risky endeavor."