Earnings season is approaching, Bank of America: The threshold for US stock market to rise is very low

The U.S. earnings season is set to kick off this week, as long as companies remain optimistic about the Fed's interest rate cut prospects, the market should have a chance to rise.

This conclusion was drawn by Bank of America based on data. The bank pointed out that, in addition to this dynamic, Wall Street has set a relatively low bar for third-quarter profit growth.

Bank of America analysts expect a 2% profit growth for U.S. stocks in the third quarter, lower than the market's expectation of 4% and the 11% profit growth in the second quarter.

Analysts stated that the modest growth in the second quarter, coupled with a cooling macro environment, has lowered investors' expectations for this earnings season.

In a report on Tuesday, they stated: "The bar is not high. As long as companies can overcome adverse macroeconomic factors and see early signs of improvement from the rate cuts, the stock market should yield returns."

Analysts believe that the market generally expects the economy's weakness to have been digested, with earnings per share expectations for this quarter lowered by 4%, making it more likely for profits to exceed expectations in a low-interest rate environment.

The Fed cut interest rates by 50 basis points at the end of the third quarter, driving the S&P 500 index to a historic high as the market began pricing in the upcoming rate easing cycle.

Bank of America analysts pointed out that lower rates will trigger a rebound in the most interest rate-sensitive industries, such as manufacturing and real estate, which have been most affected by the Fed's past rate hike cycles.

The ISM Manufacturing Purchasing Managers' Index has experienced the second-longest period of weakness in the past two years, with existing home sales down nearly 40% from the same period last year, showing clear signs of weakness against a backdrop of high rates.

Analysts recommend observing these industries before the earnings reports are released to look for early signs of improvement brought about by lower rates.

"Many people say that the rate hike cycle does not have much impact on the economy because the U.S. economy is mainly driven by consumption/services (70%). However, rate-sensitive industries (such as manufacturing and real estate) have certainly been hurt by the Fed's actions," they said, adding, "But now that the easing cycle has officially begun, we expect manufacturing and housing activities to recover healthily, driving the S&P 500 index to profit growth by 2025."

Analysts pointed out that so far, among the 21 companies that have reported third-quarter results, 62% have exceeded expectations in both earnings per share and revenue, compared to a historical average of 49% and 47% in the previous quarter.

While U.S. stocks are expected to continue to see modest profit growth this quarter, analysts state that the focus is not on this quarter, but on companies' outlook for the next few quarters under the Fed's accommodative policy.

They expect the upward trend in U.S. stocks to extend into next year, with the "Big Seven" slowing profit growth in the third quarter. Starting from the fourth quarter, profit growth for the other 493 stocks in the benchmark index should accelerate to double-digit percentages.

Analysts stated: "Although the profit of the 'Big Seven' is still expected to exceed that of the other 493 companies, given the extreme valuations and position gaps, we expect the narrowed profit growth difference to be an important driver for the broadening of the market rally."