Stocks have held broadly steady in recent weeks despite reports of stubborn inflation and the risk that the Federal Reserve will hold interest rates for longer than investors expected. Wall Street strategists say this is likely due to better-than-expected first-quarter earnings.
With 80% of companies in the S&P 500 (^GSPC) having completed reporting, the benchmark index is targeting first-quarter earnings per share growth of 5%, per FactSet. This is the strongest year-on-year increase since the second quarter of 2022 and higher than the 3.2% that analysts had expected before the start of the season.
“Higher interest rates typically hurt U.S. equity valuations,” Jean Boivin, head of the BlackRock Investment Institute, wrote in a weekly note on Monday. “Instead, strong Q1 results have supported stocks, even as high interest rates and high expectations raise the bar for what can keep markets optimistic.”
Perhaps the most notable move on the earnings front last month was its second-quarter outlook. So far, 55% of companies that have reported have given lower EPS guidance than analysts expected for the current quarter, well below the 10-year average of 63%, according to FactSet.
This is because analysts remained surprisingly optimistic for the current quarter. Analysts typically lower their earnings forecasts as the quarter progresses. That hasn't happened yet.
Through the first month of the second quarter, analysts have raised their earnings per share forecasts for companies in the S&P 500 by a total of 0.7%. This compares to a typical decline of 1.8% over the past 20 years.
DataTrek co-founders Jessica Rabe and Nicholas Colas called this an “optimistic development.”
“Despite all the uncertainty surrounding monetary policy, it is hard to see a sharp decline in U.S. large cap stocks when estimate revisions are positive,” the DataTrek team wrote. “The bear market in stocks needs an exogenous shock, and quickly.”
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