The recent surge in stock prices has been primarily fueled by strong earnings rather than external factors such as Federal Reserve actions or economic data. In fact, earnings have been so impressive that they continue to propel the market higher and higher.
The S&P 500 index has surged by an impressive 28% since hitting its lowest point in the past 52 weeks on October 12th. Just this past week, it reached a new 52-week high, signaling a strong bullish market trend.
This might come as a surprise to those who believe that S&P 500 companies are not performing well enough to justify such significant gains. While it is true that earnings growth for these companies remains moderate, with an average increase of about 3% compared to the previous year, this is lower than the 9% growth witnessed in the second quarter of 2022.
Despite this, there’s no cause for concern as approximately 80% of the companies have reported earnings that surpassed expectations. This beats the rate of outperformance from last quarter, when just under 80% exceeded expectations, and even surpasses the rate from one year ago, when just under 75% did.
Brian Rauscher, founder of BFR Research, asserts that the current earnings situation is not collapsing and any concerns he initially had about slowing earnings growth have been dispelled. The strength of the earnings reports has prompted a more positive outlook.
However, it is important to note that future earnings may not maintain the same level of superiority and could align more closely with initial expectations for this reporting season. Prior to the reports being released, some strategists had predicted a decline in profits by 4%. As of now, retailers are yet to report their earnings. If second-quarter earnings do end up lower than expected, it would mark the second consecutive quarter of declines, potentially indicating an “earnings recession.” This scenario is not surprising given the varying performance of individual companies, even within the same industry.
Rauscher emphasizes that the changing dynamics of the market, no longer buoyed by monetary or fiscal stimulus, have made it more idiosyncratic. Companies within the same sector may display vastly different performances, with some faring well and others struggling.
In conclusion, strong earnings have been the driving force behind the market’s recent surge to new highs. While the overall earnings growth remains modest, a significant proportion of companies have surpassed expectations. Looking ahead, it’s important to remain cognizant of the potential challenges that could impact future earnings. Nonetheless, the current positive earnings reports indicate a resilient market outlook despite the absence of substantial external support.
The recent performance of General Electric (ticker: GE) and RTX (RTX) highlights an interesting contrast in the aircraft engine industry. Following their earnings report on Tuesday, GE stock rose 6.3%, while RTX stock experienced a decline of 10% on the same day. The discrepancy can be attributed to quality issues that RTX encountered with one of its aircraft engines.
Another similar example can be seen in Taiwan Semiconductor Manufacturing (TSM) and Intel (INTC). TSM shares fell by 3.3% after releasing their numbers on July 20, whereas Intel observed a 5.7% increase on Friday. This surprising outcome suggests that Intel’s ongoing turnaround efforts have overshadowed cyclic concerns surrounding the chip industry.
These instances indicate the complexity of the current market that often goes unnoticed. Robert Rauscher, an expert in the field, emphasizes this point and mentions his reluctance to use the term “market.” He highlights the fact that the equal-weight S&P 500 index has only recorded a 9% year-to-date gain, lagging behind the standard S&P 500’s 20% increase.
Despite this complexity, Rauscher is actively searching for areas of strength within the market. His appreciation for Big Tech remains unwavering as companies like Microsoft (MSFT), Meta Platforms (META), Tesla (TSLA), and Alphabet (GOOGL) demonstrated strong earnings in the past week. However, these positive outcomes were not sufficient to uplift all the stocks in this sector.
Looking ahead, all eyes are on Amazon.com (AZMN) and Apple (AAPL) as their quarterly reports are due on August 3. It is worth noting that consumer-discretionary companies have experienced the fastest growth compared to last year. Coupled with the positive consumer confidence levels, this signals a promising second half of 2023 for the sector.
In light of these trends, it is time to shift our focus away from concerns about earnings. The current state of affairs indicates that earnings are more than satisfactory and will continue to propel stock values to higher levels.