Stocks have been on a tear this year. The coming earnings season will show investors whether corporate profits are backing up the market rally.

The S&P 500 has increased 9.1% year to date and is trading near all-time highs. It just clinched its best first-quarter performance since 2019.

The economy continues to be stronger than expected. Recent inflation data, though running a bit hot, suggest that price pressures are moving in the right direction. Federal Reserve Chair Jerome Powell has signaled the central bank could soon begin cutting interest rates. Rate cuts tend to push stock prices higher by stimulating economic growth and reducing the relative investing appeal of bonds. 

At the start of the year, hopes for as many as six or seven rate cuts in 2024 spurred optimism about stocks. Now, traders keep dialing back expectations. Interest-rate futures now imply that one or two quarter-point cuts are more likely than the three that Fed officials forecast in March.

If progress on inflation stalls and the Fed continues to wait to cut rates, investors could face a reckoning after such a furious ascent in stocks. Some analysts and portfolio managers believe current market prices are driven in large part by expectations that rates will fall and that, if those hopes prove unfounded, major indexes could struggle to advance further. Dallas Fed President Lorie Logan on Friday warned it was “much too soon to think about cutting interest rates.”

Investors will need other reasons to keep buying. Corporate profits could underpin the stock market’s next leg.

“If the market’s going to move higher, we think a lot of that will come from actual earnings growth,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance.

Analysts expect companies in the S&P 500 to report a third straight quarter of earnings growth. Profits for the first quarter are projected to have risen about 3.2% from the same period a year earlier, according to FactSet.

In the week ahead, investors will get results from some of the country’s biggest banks and asset managers, including JPMorgan ChaseWells FargoBlackRock and State Street. They will also get fresh inflation data likely to influence the Fed’s plans on interest rates.

Friday’s jobs report for March showed U.S. employers have kept hiring, while the unemployment rate slipped and wage growth remained contained. The U.S. added a seasonally adjusted 303,000 jobs in March, significantly more than economists expected.

“The economy really seems impervious to a slowdown,” said Sarah Henry, managing director and portfolio manager at Logan Capital Management.

Investors are interested in what quarterly results and commentary from company executives reveal about the state of the consumer. Customers are still spending, according to the latest retail-sales report. But many economists believe that Americans are close to burning through pandemic-buffered savings and are feeling stretched by higher costs on everything from groceries to rent.

Early reports suggest consumers have pulled back in certain areas. Conagra, the maker of Healthy Choice frozen meals and Slim Jim meat snacks, reported lower quarterly sales, driven by declines in its refrigerated and frozen foods business. Nike last month posted flat quarterly sales and forecast a drop in sales for the first half of the next fiscal year.

McCormick, which sells spices and flavorings, reported weaker sales volumes but an increase in earnings driven by higher prices and lower costs.

“Consumers remain challenged. Two years of steep inflation has had an impact and many are exhibiting value-seeking behavior,” McCormick CEO Brendan Foley said during the company’s recent earnings call.

Earnings results from megacap technology companies in the weeks ahead loom large over the market, given their heavy weighting in the S&P 500. Nvidia shares are up about 78% year to date, and Meta Platforms is up 49%.

Analysts expect utility companies to report the highest year-over-year earnings growth among the S&P 500 sectors, at about 24%, followed by information-technology firms at 20%, according to FactSet. They forecast the energy segment to experience the biggest profit decline compared with the first quarter of 2023. 

Earnings estimates for the rest of 2024 are upbeat. Analysts expect profits among companies in the S&P 500 to rise about 11% for the year, according to FactSet.

If results come in weaker, that could run the risk of making stocks appear more expensive relative to companies’ profits moving forward.

Investors often use the ratio of price to earnings as a gauge for whether stocks appear cheap or expensive. Companies in the S&P 500 are trading at around 20.5 times their projected earnings over the next 12 months, above the five-year average of 19.1.

“Valuations are a little stretched,” said Ed Clissold, chief U.S. strategist at Ned Davis Research. “That would leave the market vulnerable if earnings growth doesn’t come through.”