US Market - Stocktaking.
Stocks have remained resilient in recent weeks despite:
Reports on sticky inflation.
Confirmation that the Fed will hold interest rates higher for longer.
Now, Wall Street strategists believe that's likely due to a better-than-expected set of first quarter earnings.
Supporting Facts …
With 80% of the S&P 500 companies completed their mandatory reporting according to FactSet, the benchmark index is on track for a 5% growth in first quarter earnings per share. (see above)
This is (a) the biggest YoY increase since Q2 2022 and (b) higher than the 3.2% growth analysts had expected prior to the start of the season.
As highlighted by BlackRock, Head of Investment Institute - Jean Bolvin:
Historically, higher interest rates usually hurt US stock valuations.
This time round, strong Q1 earnings have supported stocks even as high rates and lofty expectations raise the bar for what can keep markets sanguine.
Wall Street’s bullish strategists have argued that strong earnings growth has driven the index's roughly 8% rally so far this year and could possibly send stocks even higher.
Citibank Concurrence.
Echoing similar sentiments is Citibank, Equity Strategy team, Scott Chronert in his Mon, 06 May 2024 research note:
At a high level, the quarterly earning season has provided support to Citibank’s bullish view toward S&P 500 fundamentals.
Coming at a crucial time as Citibank navigates the Fed and underlying economic conditions.
S&P 500 Companies’ Net Profit.
Net profit margins are pacing for 11.7% growth in Q1 2024. (see above)
As per FactSet, this is above the 5-year average of 11.5% growth and higher than Q1 2023 (11.5%) YoY.
Factors?
If one digs deeper, the “growth” has been driven by cost-cutting, not rising revenues.
In 2023, investors cheered as Big Tech's cost-cutting efforts that led to significant earnings growth.
In 2024, companies outside the tech sector adopted similar tactics, setting up the rest of the index for earnings growth through the rest of the year.
According to Bank of America, Equity strategist (for US &Canada) - Ohsung Kwon:
In “old economy” that exclude technology, costs-cutting will benefit the S&P 500 companies.
This will improve profit margins in the second half of 2024, by the time the effects kick-in.
As a result, the market rally is expected to expand.
Earnings for the remaining 493 stocks to play catch up to some of the ‘Magnificent Seven’ eg. $Microsoft(MSFT)$, $Amazon.com(AMZN)$, $Apple(AAPL)$ and $Meta Platforms, Inc.(META)$.
$NVIDIA Corp(NVDA)$ has not reported its Q1 2024 earnings yet.
What is noticeable (in April) during earnings reporting were companies’ outlook for Q2 2024.
So far, 55% companies have lowered their expectations on earnings for the current quarter.
This is lower than the 10 year average (pessimism) of 63%, per FactSet.
This is surprising because analysts usually become less optimistic about company earnings as the quarter progresses. They have not done that yet.
Instead, analysts have increased the S&P 500 companies’ earnings per share forecasts by +0.7%. (see above)
This is different from what usually happens, where analysts typically decrease their forecasts by -1.8%, based on past 20 years data.
DataTrek co-founders Jessica Rabe & Nicholas Colas declared this is a good sign for the stock market (a "bullish development"), despite uncertainty over interest rate cut remains.
They think stocks won't fall much as long as companies are still expected to make more money than originally predicted; not unless there’s a majorly unexpected event that will cause US market to fall significantly.
My Viewpoints: (mine & mine only)
The above is certainly music to my ears.
Secretly, I wish that it will be as what the Wall Street “veterans” have mentioned.
When it comes to Wall Street, we still have to take to what they say with a pinch of salt; especially when one is “sleeping” with the enemy.
Nothing guarantees a US market rally than (a) a cooling US inflation rate, month over month, (b) the Fed announces the first interest-cut of 2024 and (c) Q2 2024 quarterly earnings in 2 months’ time.
It has been widely circulated in the media that when US election momentum gathers pace, the US market should benefit indirectly.
Until then, it still boils down to fundamentals of (a) Sales, (b) Revenue, (c) Free cash flow etc..,agree?.
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Without positive mathematical expectancy it is nothing more than gambling. Be the house. Not the customer.
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