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Earnings are looking up now that we are more than halfway through earnings season

February 14, 2024

Earnings are looking up now that we are more than halfway through earnings season after having had a bit of a rough start. Last week, more than $11 trillion in market cap reported their most recent earnings and, overall, the news was very positive. The blended earnings growth rate for the S&P 500 rose to 2.9 percent, more than doubling the growth rate that we had seen coming into last week.

 

Through last week, according to FactSet Research, we have seen 67 percent of the component companies in the S&P 500 post results for the fourth quarter of 2023. Of the companies that have reported results, 75 percent (three percent higher than two weeks ago) have been surprised to the upside when looking at earnings while 65 percent (unchanged from two weeks ago) have beaten revenue expectations. Through last week, the overall blended earnings growth rate for the S&P 500 had jumped up to 2.9 percent (almost 1.5 percent better than two weeks ago). The blended earnings growth rate number continues to be surprising, especially when considering that at the end of 2023 the expected earnings growth rate for the S&P 500 was 1.5 percent. Remember that we started earnings season with a -2 percent blended earnings growth rate. Despite all the positivity that has been seen in earnings for this reporting season, we could still have some issues ahead. When looking at the 73 companies that have issued forward looking guidance, 52 (71 percent) have issued negative guidance while only 21 (19 percent) have issued positive guidance. Keep in mind, however, that a lot can change at a company during a quarter and their guidance is not always correct.

That was the positive news for the week. The negative news was the inflation report. Inflation remains a key component of this relentless rally, but unlike before, the market doesn’t need continued evidence of a decline in inflation to support the gains in stocks, namely because the Fed has said the inflation data doesn’t have to necessarily get better to justify rate cuts later in 2023. So, to threaten this rally, that means we’ll need to see a bounce back in core CPI. Barring that, CPI should not disrupt the rally.

Well, we just received a negative report which moved the markets lower today. Stocks dropped on Tuesday after hotter-than-expected inflation data for January spiked Treasury yields and raised doubts that the Federal Reserve would be able to cut rates several times this year, a key part of the bull case for the equity market.

The consumer price index (CPI) rose 0.3% in January from December. CPI was up 3.1% on an annual basis. Economists polled by Dow Jones expected CPI to have increased by 0.2% month over month in January and 2.9% from a year earlier.  Not a huge increase from expectations but negative none the less.

Core prices, which exclude volatile food and energy components, rose 0.4% month over month and 3.9% from a year ago. Core CPI was expected to have increased 0.3% in January and 3.7% from a year earlier, respectively.

"This may well come as an easy excuse to take some of the froth out of the top of this market that's been universally higher thus far this year," said Art Hogan, chief market strategist at B. Riley Financial. "The CPI was, as reported today, just a touch hotter than expectations and proof positive that we're not on a linear path, but we're on a path headed lower."

As a result of the smaller increase, this downturn was merely traders taking profits rather than a beginning of a downturn since the earnings trumps economic numbers and earnings were a surprise on the upside. 


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