As earnings season kicks into gear, can the stock market defend its rally?
NicoElNino
This week will see some of the biggest companies report their second-quarter earnings, and expectations are quite low. Traders are hoping companies clear this low bar, which could in turn help the stock market defend this year's rally.
Wall Street expects earnings for S&P 500 (SP500) companies to decline for the third straight quarter. FactSet data showed that Q2 profits likely dropped 7.2% Y/Y, which would mark the steepest drop since Q2 2020.
"Leading into Q2 reporting, estimates have been revised down more than normal," said 22V's Dennis DeBusschere. "Profitability is expected to accelerate into the end of the year and take off in 2024. But there is a growing risk of negative revisions to 2024 estimates."
The biggest name on this week's calendar is Tesla (TSLA), which already reported record Q2 deliveries. The main focus will be the impact of price cuts on margins. 
The remaining Big 6 banks - Bank of America (BAC), PNC Financial Services (PNC) and U.S. Bancorp (USB) - will report this week, along with Goldman Sachs (GS) and Morgan Stanley (MS). Results for Netflix (NFLX) and IBM (IBM) are also on deck.
Consumer-discretionary companies are forecast to post the highest earnings growth (+27%) among the S&P 500 sectors, FactSet data showed. The energy segment will likely see the biggest profit decline.
U.S. stocks have rallied this year despite stubbornly high inflation, weak consumer demand and the Federal Reserve's drawn-out tightening cycle. All major indices gained, with S&P 500 (SP500) up ~18%, Nasdaq Composite up ~36% and Dow Jones (DJI) 4% higher YTD.
"Earnings will need to be significantly better than expected... guidance must be good enough to turn earnings estimates from trending lower to higher," said Mott Capital Management's Michael Kramer. "If not, the recent rally will likely have been nothing more than a head fake."
The gains in the tech-heavy Nasdaq Composite index was spurred by the recent AI wave, and investors will be on the lookout for more updates on the new technology. 
"If enthusiasm for AI fails to adequately materialize in tech companies' earnings, we could experience at least a temporary correction in share prices," said Aneeka Gupta, director of macroeconomic research, WisdomTree.
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