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Companies Are Having Monster Earnings in The Last 2 years, How Come?

Reports of sticky inflation and the risk of the Fed holding interest rates higher for longer have not done much to damage the stock market.

Even with market uncertainty, stocks have been largely resilient in recent weeks. We can thank a better-than-expected set of first-quarter earnings for that. 

Strong First-Quarter Earnings Drive Market Rally

With over 80% of companies in the S&P 500 done reporting their metrics, the benchmark index is slated to pace at a 5% growth rate for the first quarter in terms of earnings per share. This is the largest increase, year-over-year, since the second quarter of 2022. It's higher than the 3.2% growth analysis predicted prior to the start of the earnings season.

But one can say that this doesn’t make any sense. Higher interest rates usually hurt U.S. stock valuations. Instead, the stock market seems to have a mind of its own, as strong Q1 earnings have done a great job supporting stocks even as lofty expectations and high rates raise the bar for what it takes to crack the market.

Some Wall Street analysts are going so far as to say that the strong earnings growth is the primary factor driving the index’s rally of over 8% so far this year and could even send stocks flying higher. 

A large fact to support this claim is that company net profit margins are pacing at around 11.7% growth in the first quarter, which is above the five-year average of 11.5% growth and much higher than the same period a year ago. This is a great sign for the economy if you take away inflation and the Fed.

Cost-Cutting Strategies Drive Market Rally

Why is this the case?

It's definitely not revenues. Cost-cutting has been the corporate trend for many companies, especially in Big Tech. In 2023, investors cheered as tech companies slashed payroll and other labor expenses to bring significant earnings growth for their companies. If revenue stays the same but costs go down, well, simple math can tell us that net income will increase for the company.

Looking at how well thats worked for Big Tech, in 2024, companies outside of tech have tapped into this playbook themselves, setting up the rest of the index for strong earnings growth throughout the rest of the year, even if revenue didn't increase for the companies.

This could allow for a market rally many have called for, one in which non-tech companies within the S&P 500 are finally able to catch up to the Magnificent Seven technology stocks. 

Analyst Optimism for the Current Quarter

So far, analysts continue to remain optimistic about the current quarter. Oftentimes, analysts cut earnings forecasts as the quarter rolls along. This has not happened as of now.

Over the first month of the second quarter, analysts have raised their earnings per share projects for the companies within the S&P 500 by an aggregate of 0.7%.

Compared to the usual decline of 1.8% around this time in the past 20 years, this looks to be a great sign for the market and a major bullish development. It is hard to see US large caps falling when earnings estimate revisions are so positive. For the bears to win, a major market shock needs to come along, which is unlikely.

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