Earnings season is coming to an end, and the performance of the US stock market is lukewarm. With high valuations, it may be difficult to be optimistic about the future.

According to Dolphin Research APP, stock market investors are temporarily satisfied with the performance of US companies so far this year, but they may not be as easily satisfied for the rest of 2023. As the second quarter earnings season comes to an end, the performance of companies in the S&P 500 index is mixed: although revenues have dropped to the lowest level since early 2020, corporate profits have exceeded analysts' expectations at the highest rate in nearly two years.

Data from Refinitiv IBES shows that 91% of S&P 500 index component companies have reported their second quarter earnings, with 78.7% of companies reporting profits higher than analysts' expectations. Overall, these companies have reported earnings that are 7.7% higher than analysts' expectations, surpassing the long-term average of 4.1%. However, in terms of revenue, only 62.9% of companies have exceeded analysts' expectations, the lowest level since the first quarter of 2020.

Julian Emanuel, an analyst at Evercore ISI, said that the stock market's reaction to second quarter earnings has been lukewarm, with stock prices showing weaker reactions to both positive and negative earnings surprises compared to the average level of the past five years.

John Lynch, Chief Investment Officer at Comerica Wealth Management, said, "The market has shifted from 'earnings must be supportive' to 'fortunately earnings didn't mess things up.' This will only take us into a more expensive territory."

However, due to growing optimism about a soft landing for the US economy, investors expect corporate profits to rebound. Given the surge in US stock valuations, investors may not be as forgiving if US companies underperform later this year. Eric Freedman, Chief Investment Officer at Bank of America Asset Management, said, "This is a market that has risen on earnings expectations, and we haven't fully realized those earnings expectations yet."

According to Refinitiv IBES, investors expect S&P 500 index component companies to see a 1.3% year-on-year growth in earnings in the third quarter, a 9.7% year-on-year growth in the fourth quarter, and a 11.9% growth for the full year of 2024.

At the same time, the valuation of the S&P 500 index continues to rise. According to data from Refinitiv Datastream, as of last Thursday, the index's 12-month forward price-to-earnings ratio was 19.1 times, higher than the long-term average of 15.6 times. An analysis by a strategist at Credit Suisse showed that valuation growth this year has contributed 86% to the index's returns from the beginning of the year to July, with the remaining contribution coming from positive changes in earnings expectations.

Ameriprise Financial's Chief Market Strategist, Anthony Saglimbene, said, "Currently, the valuation of the S&P 500 index has exceeded its fundamentals, so companies now have to prove that they can bring profit growth."

Despite the general optimism among investors about the economic outlook, some are still concerned that the lagging effects of interest rate hikes could lead to an economic downturn, as indicators such as the yield curve of U.S. Treasury bonds continue to flash "warning signals." A recession could significantly alter the profit prospects of companies and further depress valuations. Data from Ned Davis Research shows that during an economic recession, the average annual decline in corporate revenue is 24%.

John Lynch stated, "Despite the market remaining optimistic, from a consensus perspective, I still have doubts about whether we will be too optimistic after entering next year. It is precisely because we have not experienced a recession this year that the yield curve of U.S. Treasury bonds continues to point to a recession."