Stocks have remained largely resilient in recent weeks despite reports of sticky inflation and risk that the Federal Reserve holds interest rates higher for longer than investors expect. Wall Street strategists believe that’s likely due to a better-than-expected set of first quarter earnings.
With 80% of the companies in the S&P 500 (^GSPC) done reporting, the benchmark index is pacing for 5% growth in first quarter earnings per share, per FactSet. This is the biggest year-over-year increase since the second quarter of 2022 and higher than the 3.2% growth analysts had expected prior to the start of the season.
“Higher interest rates usually hurt U.S. stock valuations,” Jean Boivin, the head of the BlackRock Investment Institute, wrote in a weekly note on Monday. “Instead, strong Q1 earnings have supported stocks even as high rates and lofty expectations raise the bar for what can keep markets sanguine.”
Perhaps the most notable move on the earnings front in the past month has come in second quarter outlooks. Thus far, 55% of the companies that have reported have given lower EPS guidance than analysts expected for the current quarter, well below the 10-year average of 63%, per FactSet.
This comes as analysts have remained surprisingly optimistic on the current quarter. Typically, analysts cut earnings forecasts as the quarter rolls on. That hasn’t happened yet.
Through the first month of the second quarter, analysts have raised their earnings per share projections for companies in the S&P 500 by an aggregate of 0.7%. This compares to a usual decline of 1.8% over the past 20 years.
DataTrek co-founders Jessica Rabe and Nicholas Colas described this as a “bullish development.”
“Even with all the uncertainty around monetary policy, it is hard to see US large caps falling very much when estimate revisions are positive,” the DataTrek team wrote. “The bear case for stocks needs an exogenous shock to come along, and quickly.”
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