Recession fears are fading. Now it’s time for America’s companies to back that up

New York (CNN) — Hopes for avoiding a recession are growing on Wall Street. Now, investors are looking for the coming earnings season to support that optimism.

Companies in the S&P 500 reporting third-quarter results are expected to have posted a 3.7% rise in profits from the prior year, according to FactSet estimates. That would mark the fifth consecutive quarter of earnings growth.

The S&P 500 index has gained roughly 21% for the year, notching dozens of record highs along the way as artificial intelligence enthusiasm helps drive stocks higher. Rising confidence that the US economy will achieve a soft landing, or a scenario in which inflation comes down without a recession, has also helped boost stocks in recent months.

Now, investors are looking to the upcoming earnings season for clues about the US economy’s health. Recent data has suggested that the US economy is still on strong footing. Job gains in September blew past expectations. The Bureau of Economic Analysis’s third estimate of second-quarter US gross domestic product came in at a solid 3% annual rate.

Early quarterly updates have shown a mixed view of the US economy. PepsiCo beat profit predictions but missed revenue expectations. The company also lowered its 2024 revenue forecast. Conagra Brands reported a decrease in quarterly sales but reiterated its 2025 outlook. General Motors raised its full-year adjusted earnings guidance.

“It’s all about putting together a detailed picture of the economy as a whole,” said Sarah Henry, managing director at Logan Capital.

The earnings season begins in earnest Friday with quarterly updates from big banks including JPMorgan Chase, Wells Fargo and BlackRock. Wall Street will also parse the September Consumer Price Index report and wholesale inflation figures due later this week.

The Federal Reserve last month slashed interest rates by a whopping half-point, bringing rates down from a 23-year high. Rate cuts tend to be positive for the economy, since they lower borrowing costs and tend to boost stock prices. But they also take time to make their way through the economy, making the next few months a pivotal time for the Fed, economy and stock market.

Inflation data over the past few months has shown that price hikes are continuing to ease closer to the Fed’s 2% target. Investors are also keeping an eye on developments in the Middle East after an escalation in conflict this month pushed oil prices higher and spurred concerns about whether that could spike inflation.

Wall Street will also eye developments from the tech companies whose mammoth stock returns have helped power this year’s bull market. Tech stocks have stumbled in recent months, in part because Wall Street is questioning whether massive investments in AI will translate to a boost in corporate top lines.

“Investors are expecting nothing short of fireworks,” wrote Mark Malek, chief investment officer at Siebert, in a Wednesday note.

Tech companies are expected to log the biggest earnings growth in the S&P 500. Analysts polled by FactSet expect the information technology sector, which houses Apple and Nvidia, is projected to report earnings growth of 15% from the prior year. Communication services, which contains Meta Platforms and Alphabet, is projected to log a 9.9% jump in profits.

Still, some investors say that they are looking outside of just tech. Soft landing optimism has led the 2024 stock rally to broaden as of late into more neglected areas of the market such as small-caps. Dave Sekera, chief US market strategist at Morningstar, says that small-caps and value stocks are cheaper, more attractive bets than their large-cap counterparts.

“That (stock rotation) has further to run,” said Sekera.

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