Investors say high expectations for U.S. corporate profits after a shaky start to 2025 mean a raft of earnings reports over the next two weeks will play a particularly important role in determining the direction of stocks on Wall Street.
Last week, the S&P 500 had its best week since the U.S. election in November, driven by strong data from big banks, pushing the index back into the black in January.
But investors say a strong performance will be needed if the market is to surpass last month's all-time high, with many household names - worth a combined $25 trillion - reporting by the end of January.
Analysts predict net profits for S&P 500 companies will grow 11.4% year-on-year, the best quarterly performance in three years, according to FactSet.
The index soared 23% last year as demand for artificial intelligence-related stocks fueled gains in technology companies. That leaves the S&P with a forward price-to-earnings ratio of 21 times, according to LSEG.
Jurrien Timmer, global head of macro at Fidelity Investments, said: "Markets cannot rely on multiple expansions to boost returns because they have already expanded a lot in 2024."
"This places an increased burden on corporate earnings to be a major contributor to market returns," he added, noting there was uneasiness about rising interest rates.
Barclays strategists said that on average, January's stock market decline would result in a median return of 2.5% for the rest of the year. However, if the gain is at least 1.5% in the first month after opening the position, the annual return will often exceed 11%.
After setting a series of record highs in 2024, stocks have fallen in recent weeks amid worries that rising interest rates could hurt economic growth and uncertainty about possible early action by the incoming Trump administration.
Companies including Netflix, General Electric and consumer products group Procter & Gamble are set to report earnings this week. Tech giants including Amazon, Microsoft, Facebook parent Meta and Tesla are set to go public next week.
The highest growth is still expected to come from the technology sector, including the so-called "Big Seven," but investors are also looking for signs of improving profitability in other sectors, hoping that will lessen the S&P 500's reliance on a handful of stocks.
According to FactSet data, the earnings of the seven giants including Apple, Microsoft, Alphabet, Amazon, Tesla, Meta and Nvidia are expected to grow by 21% this year, slowing down from the 33% growth in 2024. Earnings growth for the other 493 stocks in the index is expected to rise from 4% to 13%.
Market participants will also be closely watching executives' views on incoming President Donald Trump's likely policy agenda, with markets rallying since his November election victory based in part on hopes of business-boosting deregulation and tax cuts.
Concerns about Trump's actions could also overshadow strong earnings reports if the president follows through on some tariff threats, which could hurt multinational companies' prospects.
About 30% of S&P 500 companies' revenue comes from outside the United States, and for every 10% appreciation of the U.S. dollar, average company earnings per share decline by 3%.
"The growth rate differential between the Big Seven and the rest of the market is key, but I'm more interested in the companies' guidance since the election related to the pro-business narrative," said Kevin Gordon, senior investment strategist . Charles Schwab.
"We're probably going to see a mismatch between frothy animal spirits and last quarter's numbers that were probably disappointing. I wouldn't buy that deregulation (under Trump) is going to be a huge growth story," he added .
Additional reporting by Ray Douglas