Sarah Travers
As inflation fears grip the market, Wall Street remains resolute in its optimism, banking on robust earnings to fuel the resilient stock rally. A recent inflation print has dashed hopes for imminent interest rate cuts, redirecting attention to the bedrock of corporate performance.
The buoyancy in the stock market, which initiated last year and saw its best first quarter in five years, finds its sustenance in the earnings season, according to analysts. Despite a sluggish start to April, experts are hesitant to bet against the market, citing the ongoing momentum backed by a promising earnings outlook.
Analysts foresee a healthy 10% gain in earnings for S&P 500 companies in the first quarter, a projection supported by more upgrades than downgrades. This optimism is further fueled by the revival of global economic growth, indicating a broad-based resurgence rather than sector-specific buoyancy.
While concerns over inflated valuations persist, rising profit forecasts offer a reprieve, lessening worries of a market bubble. The recent surge in stock allocations underscores investors’ confidence, with sentiment approaching its highest levels in nearly two years, albeit not yet reaching euphoric extremes.
However, skepticism lingers following indications from Federal Reserve officials of prolonged high-interest rates. Last week’s comments triggered a notable selloff, prompting traders to reassess their risk management strategies after months of complacency.
Despite the uncertainty, the reversal in stocks following a stronger-than-expected US jobs report underscores traders’ eagerness to capitalize on any pullback. Forecasts for tech earnings remain robust, with expectations of a staggering 20% profit surge in the first quarter. Additionally, signs of improvement in economically sensitive sectors suggest a more holistic rally.
The stock market’s trajectory, according to analysts, hinges on the sustainability of earnings strength. Multiples are currently extended, making continued earnings growth imperative. Any softness in earnings could signal trouble ahead, potentially heralding a weakening US consumer and economy.
While some voices caution against a potential 2-3% pullback, contingent upon macroeconomic deterioration or negative sequential growth in earnings, others remain resolute in their bullish outlook. The consensus appears to be that the market rally has more room to run, supported by solid fundamentals and a resilient earnings landscape.
Looking ahead, market participants are keenly eyeing the upcoming earnings season for validation of their optimism. Should corporate America deliver on its promise of strong earnings, it could provide the necessary impetus to propel the stock market rally onward, despite lingering inflation concerns and the specter of high-interest rates. While the road ahead may be fraught with uncertainty, Wall Street’s faith in earnings remains unwavering, serving as a beacon of hope amidst turbulent market conditions.
