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'One of the best quarters we've ever seen' may not move the stock market much higher, expert says. Here's why

"It should serve as a reminder of just how quickly the economy has come back."

Traders on the floor of the New York Stock Exchange
Source: NYSE

This week, companies will begin reporting earnings for the quarter that ended June 30, and the numbers are likely to be eye-popping. Profits for companies in the S&P 500 are expected to have jumped by nearly 66% from the same three-month period in 2020, according to Wall Street estimates aggregated by Refinitiv.

"This is one of the best quarters we've ever seen in terms of year-over-year earnings growth," says Ryan Detrick, chief market strategist at LPL Financial. "It should serve as a reminder of just how quickly the economy has come back."

Companies in the financial sector will get things started this week, with the likes of JPMorgan, Goldman Sachs, Bank of America, Citigroup, and Wells Fargo expected to report an earnings boost of nearly 103% from the year before, per Refinitiv. Sectors that were hit hardest in the early stages of the pandemic, including industrial, consumer, and energy firms, are expected to post the biggest numbers.

Why stocks may not bounce on great earnings news

Companies posting better-than-expected earnings typically prompts investors to boost stock prices. But even if companies post huge numbers in the coming days, don't be surprised if stocks don't move much, says Detrick.

For one thing, that companies are exceeding expectations shouldn't be too big of a shock. Uncertainty surrounding the pandemic led corporate executives to keep their earnings forecasts muted, he says. And Wall Street didn't know how things would pan out either, he adds: "Analysts were flying blind."

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Though robust earnings numbers are undoubtedly great news for stocks, that news may already be reflected in recent record-high prices. "People are aware that this is going to be a great quarter for earnings, and stocks are at all-time highs," Detrick says. "Much of this growth has already been priced in."

In other words, the stock market is forward-looking. Investors seeking to get a handle on the direction of the stock market would be wise, then, to keep an eye on where earnings are likely headed from here.

Experts say companies should continue to report strong results as the economy continues to reopen, but that much of the post-pandemic economic recovery has already happened. That means returns could be more mild than in the first half of the year, when the S&P 500 logged a 14.4% game. It may also spell more volatility.

"Once you pass the peak of economic growth as well as earnings growth, you do get higher levels of volatility," Matt Stucky, portfolio manager, equities, at Northwestern Mutual Wealth Management Co., told CNBC. "We still think the path of least resistance is higher when it comes to equities, but with more volatility than we've had."

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