‘Better than feared’ — a theme that fueled stock gains for the past two earnings seasons — is not going to be enough this time around.

That’s according to a growing chorus of strategists, who say the bar is now much higher for US stocks to extend a first-half rally, because valuations have soared so much relative to the rest of the world. And it’s likely to get even more challenging for equities from here as surprisingly strong economic data supports a path of higher-for-longer interest rates.

“With second-quarter earnings beginning this week, ‘better than feared’ likely isn’t going to cut it anymore,” Morgan Stanley’s Michael Wilson — one of the most bearish voices on Wall Street — wrote in a note on Monday. Higher interest rates and dwindling liquidity suggest stock valuations are vulnerable unless companies boost forecasts, he said.

That echoes comments last week from Deutsche Bank strategists led by Binky Chadha, who said that a rally for US equities leading up to the earnings season mean that the reaction to results, even if they’re strong, is likely to be muted. Chadha was among the few strategists calling for a rally in stocks in the first quarter of 2023.

A subdued reaction would be in contrast to history. Earnings seasons have typically been positive for equities, with the S&P 500 Index up 2% on average in the first four weeks, according to Deutsche Bank. Resilient profits also contributed to the index’s 16% rally in the first half of 2023 — its best January-June performance since 2019.

The second-quarter earnings season kicks off with reports from big US banks including JPMorgan Chase & Co. and Citigroup Inc. on Friday. Companies are expected to face the biggest EPS decline in the second quarter, according to consensus, and pull out of their earnings recession in the fourth quarter, though further negative revisions could lengthen the downturn, according to Bloomberg Intelligence.

Wilson — whose pessimistic view on stocks has yet to materialize this year — said he expects further cuts to analysts’ earnings projections in the second half of the year, “so the key for stocks will come via company guidance for the out quarter rather than the results themselves.”

US stocks rallied in the first half of 2023 on better-than-feared earnings and expectations of peaking rates, catching a majority of Wall Street strategists off guard in their projections for the year. But profit downgrades are picking up again, and investors are increasingly expecting a choppy outlook for stocks for the rest of the year. There’s early evidence of that playing out in July, with the S&P 500 posting a decline last week amid fears of a hawkish-for-longer Federal Reserve.

Bloomberg’s latest Markets Live Pulse survey found that participants are bracing for profit warnings and expect higher interest rates to spark further declines in the S&P 500 this earnings season. Overall, analysts expect second-quarter earnings to have fallen almost 9% — the biggest year-over-year decline since 2020, according to data compiled by Bloomberg Intelligence.

Meanwhile, the equity strategy team at Goldman Sachs Group Inc. said they expect US companies to “meet or exceed the low bar” set for the second quarter. However, they view analysts’ expectations of a rebound in profits in 2024 as “too optimistic.”