Corporate Earnings Beats May Not Sustain Stock Rally as Focus Shifts to Profit Outlooks

Despite a strong earnings season, with 75% of S&P 500 companies beating operating earnings estimates and 59% beating sales estimates, thestock rallymay not be sustainable due to shifting focus on profit outlooks. The S&P 500 Index rose 5.6% in the first four months of 2024, with 10 out of 11 sectors up. The "Magnificent Seven" mega-cap stocks, led by Nvidia, contributed approximately half of the broader index's return.

Why this matters: The sustainability of the stock rally has significant implications for investors and the overall economy, as a decline in stock prices could lead to reduced consumer spending and economic growth. Furthermore, the shift in focus to profit outlooks may indicate a more cautious approach by companies, which could impact hiring and investment decisions.

As of the end of April, 64% of S&P 500 market value companies reported first-quarter 2024 earnings, with earnings expected to increase 5% from the first quarter of 2023. The three largest U.S.-listed ETFs, tied to the S&P 500 Index, are the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the Vanguard S&P 500 ETF (VOO), with assets of $500 billion, $400 billion, and $400 billion, respectively.

While the strong earnings season has boosted the stock market, investors are now shifting their focus to profit outlooks, which may not be as optimistic. The S&P 500 Index remains a popular choice for investors seeking broad exposure to the US equity market, with ETFs providing a low-cost and liquid way to access the market. The index has undergone changes, with the addition of healthcare company Solventum and GE Vernova, and the removal of V.F. Corp and Dentsply Sirona.

The S&P 500 has seen more than half of its index report earnings, with companies largely surprising to the upside, pacing at 5.5% earnings growth this quarter according to Evercore ISI. Despite strong earnings,stock reactionshave been mixed due to concerns about interest rates remaining high for longer than expected and companies struggling to impress investors.

Notable earnings reports included Tesla, which saw its stock rise over 10% despite missing expectations, driven by Elon Musk's announcement of a low-cost vehicle launch and emphasis on autonomous ridesharing. Alphabet soared after announcing its first-ever cash dividend and approving $70 billion in stock repurchases. Meta fell over 10% on light revenue guidance and spending concerns. Starbucks reported a dismal quarter, missing estimates across the board.

Spending was a large focus of quarterly reports, with companies announcing plans to increase capital expenditures amid the AI spending rush. AI hype appeared to weigh on stocks in the chip space, with high expectations plaguing companies like Super Micro Computer and AMD. Despite strong earnings, stock reactions have been mixed, and companies are struggling to impress investors given the market's roaring rally going into the reporting period.

The stock market surged on Friday following the strong earnings reports and a softer-than-expected jobs report. The Dow jumped 450.02 points or 1.2% to 38,675.68, the Nasdaq spiked 315.37 points or 2.0% to 16,156.33, and the S&P 500 shot up 63.59 points or 1.3% to 5,127.79. "the softer jobs report with higher unemployment, lower-than-expected wage growth, and job creation shows that inflation pressure from wages is easing," noted Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance.

With the U.S. economic calendar relatively quiet next week, the spotlight may shift to earnings news from several big-name companies. However, some experts caution that the stock rally driven by strong earnings beats may not be sustainable as investors turn their attention to forward-looking profit outlooks, which could paint a less optimistic picture. The market's ability to maintain its momentum will likely depend on the tone of guidance provided by corporate leaders.

Key Takeaways

• 75% of S&P 500 companies beat operating earnings estimates, 59% beat sales estimates.
• Stock rally may not be sustainable due to shifting focus on profit outlooks.
• S&P 500 Index rose 5.6% in first four months of 2024, led by "Magnificent Seven" mega-cap stocks.
• Strong earnings season boosted market, but investors now focus on profit outlooks, which may be less optimistic.
• Market's momentum depends on tone of guidance provided by corporate leaders.