Earnings season is heating up and will take center stage for a while until the spotlight turns to the Fed for their next rate hike decision on 7/26.
So, let’s see examine these two important events to see what it means for the market outlook.
Market Commentary
First let’s quickly check in with the recent price action.
Some are calling it at FOMO rally as more bears throw in the towel and hit the buy button. While others are calling it a melt up as it never goes up by much on any given down....but it just doesn’t seem to go down that much either.
No matter what you want to call it...conditions are bullish and investors are wise to be invested in the best stocks. Gladly quarterly earnings season provides an important health check to tell investors which are truly the best stocks.
Let me share the insights from my longtime colleague, Nick Raich, who does a stellar job breaking down earnings insights over at his firm EarningsScout.com.
This is what Nick said on Thursday morning:
- “11 out of 16 S&P 500 companies reporting this morning beat their 2Q 2023 EPS expectations, but only 9 exceeded their sales targets.
- So far, we have collected 2Q 2023 results for 77 S&P 500 companies.
- 78% have beaten their EPS estimates, slightly below the 3-year average of 80%.
- Only 62% have exceeded their sales targets, well below the average of 73%.
- After reporting, 51 out of the 77 companies have had their 3Q 2023 EPS estimates lowered, by a slightly greater amount than last earnings season.
- The market multiple has shot up to 21.07x its FY 2023 EPS estimate as S&P 500 (SPY) EPS expectations fall and price rises.
- At the market bottom on October 12, 2022, the comparable PE multiple was only 15x.
- Our research justifies the rise in the multiple, but if estimate trends don’t keep improving, stocks will be at increased risk of a pullback.”
I highlighted the 3 key bullets. Right now investors are pretty euphoric given the price action based mostly on signs of inflation abating which should lead the Fed to lowering rates down the road. Thus, investors are finding it too easy to celebrate headlines that talk about earnings beats.
The problem with that surface level approach is that investors have always been better served with a focus on the future. That is why revisions to earnings estimate revisions tend to be a much better predictor of future stock prices than whether they beat or missed expectations from the past.
Thus, when you see that 66% of the companies (51 out of 77) are having their Q3 estimates cut, it calls into question just how rampant the buying activity should be at this point. That is especially true when combined with the other 2 bullets I highlighted showing that valuations are not cheap which could spell a future pullback.
No...I am not saying return to the bear market. Just that the market often does a dance of two steps forward and one back. Or what others think of as the digestion phase after eating a big meal.
So given the big rally in hand, and the not so impressive earnings results, I think we are setting ourselves up for at least a consolidation period under 4,500...and maybe a modest 3-5% pullback to rest before the next run higher. And potentially that pullback kicked off Thursday given one of the bigger daily sell offs in a while.
Also the next Fed meeting on 7/26 will weigh on the market outlook. It is a forgone conclusion that they will raise rates by another 25 basis points. However, more and more investors think that will be their final rate hike given the steady lowering of inflation found in this month’s CPI & PPI reports.
Investors will be very keyed in on statements as to how many Fed members think more rate hikes will be needed. And if there is any budge on their pledge to not lower rates til 2024.
Any signs of a “dovish tilt” in the announcement will be quite favorable for stocks. Whereas any signs that they are sticking to their hawkish rate hike plans could be the spark for that aforementioned pullback.
Regardless of market direction, our goal is to focus on the best investments to keep us on the right side of the action. And that is exactly what we will do in the next section...
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Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return
SPY shares were trading at $453.51 per share on Friday afternoon, up $1.33 (+0.29%). Year-to-date, SPY has gained 19.48%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
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