At the beginning of April, U.S. stocks reached a nadir, with the S&P 500 matching its February low at 2,581. Then Q1 earnings season started, large-cap companies posted their best quarter of EPS growth in eight years, and stocks righted the ship, jumping 6% over the next six weeks.
Coincidence? Perhaps. Here’s what the about-face in the market since the start of Q1 earnings season looks like on a chart:
To be fair, stocks had bottomed a week before Q1 earnings season got underway the second week of April. So the beginning of the market turnaround may have been purely technical, with the S&P bouncing off of 2,581 support for the second time in two months. But the current rebound has been more sustained than the false start in February, and 24% earnings growth has undoubtedly had something to do with that.
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With 93% of large-cap companies reporting first-quarter results, the average growth among S&P 500 companies is 24.5%, putting it on track for the fastest-growing quarter since the third quarter of 2010. Because it’s the first full quarter since Donald Trump’s corporate tax cuts were signed into law in December, booming profit growth from America’s largest companies isn’t a huge surprise. But the 24.5% growth is high even compared to analysts’ lofty expectations—estimates were for 17.1% EPS growth, according to earnings-season tracker FactSet.
That element of surprise may be the true driving force behind the recent market rebound. Through last Friday, 78% of companies had beaten consensus Q1 estimates—the highest surprise percentage since FactSet began tracking stats in 2008.
So, with earnings growth at an eight-year high and earnings surprises at a decade high (at least), it’s entirely possible that Q1 earnings season has saved investors from a much longer and deeper market correction. We’ll never know for sure. Here’s what we do know:
-Mike Cintolo, our resident market expert and chief analyst of our Cabot Growth Investor and Cabot Top Ten Trader advisories, says the intermediate-term trend is now “positive.”
-Chloe Lutts Jensen, chief analyst of our Cabot Dividend Investor advisory, says, “Conditions are in place for a sustained rally.”
-Our Advisor Sentiment Barometer, managed and monitored by our Nancy Zambell, is inching close to “Aggressive.”
A month ago, none of those three experts were nearly as optimistic about the market’s direction. While we’re not completely out of the correction woods, and Mike Cintolo in particular continues to preach caution, everyone agrees that the intermediate-term trend is now up. Surely, a record-setting earnings season had something to do with that.
Now, the question is: have stocks stabilized enough to continue rising after this stellar earnings season comes to a screeching halt? A month from now, we’ll know the answer. If the S&P breaks above post-correction resistance at 2,786 in the coming weeks, then the answer will likely be a resounding yes.
Until then, pay close attention to what our analysts are saying. And the best way to do that is to subscribe to any one of our 12 investment advisories. To do that, click here.
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