The market's focus during the past week has been solely on one factor—the impressive earnings reported by companies. These earnings have played a significant role in driving stocks higher, and the S&P 500 has surged by 28% since its 52-week low recorded on Oct. 12. In fact, the index reached a new 52-week high on Friday, signaling a bullish market.
It may seem unusual, especially to those bearish on the market, as the earnings of S&P 500 companies are still considered average and not substantial enough to explain the substantial gains. At present, earnings for S&P 500 companies have increased by an average of about 3% year-on-year, which is lower than the 9% growth witnessed in the second quarter of 2022.
Despite this, the overall situation appears promising as approximately 80% of the companies have reported earnings that exceed expectations. Although it is typical for a majority of companies to surpass earnings estimates, this quarter's performance surpasses that of the previous quarter (when just under 80% beat expectations) and the same period last year (when slightly less than 75% exceeded expectations).
Brian Rauscher, the founder of BFR Research, affirmatively states that current earnings are not plummeting and expresses relief over his previous concerns about a decline in earnings growth. Any apprehensions he had have been dispelled.
However, there is always a chance that these favorable earnings may decline and correlate more closely with initial expectations, which anticipated a decline of 4%. It is noteworthy that retailers have yet to disclose their earnings. Should second-quarter earnings turn out to be lower overall, it would mark the second consecutive quarter of decline, inevitably leading to an "earnings recession." This trend is unsurprising given the varying performance levels among companies within the same industry.
Rauscher explains, "It's becoming more idiosyncratic because you're not getting a huge tailwind from either monetary or fiscal stimulus. You are getting two names in the same space, one OK, one not so OK."
All in all, it is clear that the notable earnings reported by companies have been a driving force behind the recent market surge. This focus on earnings, rather than other factors such as the Federal Reserve or economic data, has ultimately propelled stocks to new heights.
The Complexity of the Market: Looking Beyond Earnings
General Electric vs. RTX
When examining General Electric (ticker: GE) and RTX (RTX), both known for manufacturing aircraft engines, one may notice a stark contrast in their recent performance. After reporting earnings on Tuesday, GE stock rose by an impressive 6.3%. In contrast, RTX stock experienced a significant decline of 10% on the very same day. The key differentiator? RTX faced quality issues with one of its aircraft engines, impacting investor sentiment.
Taiwan Semiconductor Manufacturing vs. Intel
Another notable example is Taiwan Semiconductor Manufacturing (TSM) and Intel (INTC). Following the release of their financial numbers on July 20, TSM shares witnessed a dip of 3.3%. Conversely, Intel's stock experienced a surge of 5.7% on Friday. It appears that Intel's focused turnaround efforts outweighed any cyclical concerns surrounding the chip industry.
Recognizing the Complexity
These instances highlight the underlying complexity of the current market, which often goes unnoticed. Rauscher, a market analyst, emphasizes this point by stating, "I've stopped using the word 'market.'" He notes that while the equal-weight S&P 500 index has only seen a 9% increase year-to-date, the standard S&P 500 has achieved a substantial gain of 20%.
Amidst this intricacy, Rauscher actively seeks out pockets of strength within the market. One area he remains enthusiastic about is Big Tech. Notably, Microsoft (MSFT), Meta Platforms (META), Tesla (TSLA), and Alphabet (GOOGL) all reported robust earnings this past week, although not sufficient enough to bolster all corresponding stocks.
Looking forward, Rauscher anticipates positive results from Amazon.com (AZMN) and Apple (AAPL), slated to reveal their quarterly reports on Aug. 3. The consumer discretionary sector has shown impressive growth in comparison to last year, further reinforced by better-than-expected consumer confidence. These factors bode well for the sector's performance throughout the latter half of 2023.
Moving Beyond Earnings Anxiety
It is essential to alleviate concerns surrounding earnings. Their performance remains satisfactory, fueling the upward trajectory of stocks in the market.