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It's all about earnings for investors

The stock market may be on a trade-talk-induced high, but market analysts say a sustainable rally can’t be supported without fundamental strength in earnings.

“Earnings have been lost amid this trade-talk soap opera,” Tom Essaye, founder of The Sevens Report, said on Yahoo Finance’s “The First Trade.” “If earnings come in stronger than expected, that could help the S&P 500 rally past 3,000.”

Corporate America will unleash a deluge of earnings on investors beginning next week, when the big banks release their profit report cards.

Goldman Sachs (GS), JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) kick off earnings season on Oct. 15th.

Great expectations

Expectations for third-quarter earnings overall are low, with analysts projecting U.S. companies to say profits fell 3% from a year earlier.

As always, investors will be laser-focused on what companies have to say about the future which, according to some estimates, may look a little too rosy.

Most analysts are calling for a 10% rise in 2020 profits for S&P 500 companies, despite an unresolved trade war and a global economic slowdown.

”Those 2020 earnings are stale, and they have to come in,” said Alicia Levine, chief strategist for BNY Mellon. She predicts by the end of this year, estimates for 2020 earnings will most likely be around 7%.

Too hard to call

Still, the unpredictability of the U.S.-China trade war has made it nearly impossible for CEOs to accurately predict future earnings.

While companies may have to deal with a slowing economy, Levine doesn’t see a recession on the horizon.

“If you get a trade deal with some reduction in tariffs, you avoid a recession because you’ll get capex [capital expenditure] spending again,” she says.

At Yahoo Finance’s All Markets Summit Thursday, Minneapolis Federal Reserve President, Neel Kashkari, said the risks of recession “have materially increased to the downside,” pointing to strong job growth and rising wages as reasons that a recession is not imminent.

“The question is whether the trade war has gone on too long,” said Levine.

“We’ve had a trade war for 18 months,” she said. “If the tariffs go on much longer, it will be hard to reverse the march towards recession, but our base case is for no recession, because we think there’s an incentive on both sides to get a deal done by the first or second quarter of next year.”

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

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