Broker Check

Company Outlooks Improve

May 14, 2024

            Almost 92% of S&P 500 companies have released their first quarter financial reports through May 13th. Sales and earnings growth have been respectable, with sales rising 3.83% while earnings have grown 5.52%. Perhaps more importantly, earnings guidance and estimates have stabilized and inflected higher. Companies and investors seem to be slightly more confident now. Companies that missed were penalized, but there were more companies with positive versus negative surprises. Revenue growth was not isolated to a couple sectors. Five sectors saw revenue rise at least six percent, while six sectors saw earnings grow more than ten percent for the quarter.

            Stocks pulled back 5.46% from their first quarter closing high to their low reached on April 19, 2024. They have now reversed almost all those losses. The exact reasons for market movements are hard to pinpoint, but some likely causes of the decline were the stock buyback blackouts before earnings reports, the wait for big tech earnings, and higher interest rates. Moreover, the S&P 500 had risen more than ten percent in the first quarter and a pullback was needed. The rally that followed was helped along by interest rates coming down a little and strong earnings reports. If interest rates stay contained and earnings growth remains solid, the downside case for equities is weak. Inflation data will be of primary importance. Better inflation data would take five percent interest rates off the table along the Treasury curve in the short term. It would also signify that inflation may be more contained than feared outside of shelter costs. We see rates of five percent or higher as problematic for equity markets at these valuations.

            Equity valuations are stretched by some measures, and reasonable by others. NPP does not expect double digit returns during the rest of 2024. There will likely be more choppiness throughout 2024, especially given the uncertainties of the upcoming election season. If earnings growth continues near its recent pace, and we think it will, equities will likely follow earnings higher. We remain cautiously optimistic but continue to believe that investors should not take excessive risks after recent gains.