The Outlook for the Stock Market’s Most Important Driver Continues to Brighten
The stock market’s most crucial driver, earnings growth, has been on a tear in recent quarters. According to data from FactSet, S&P 500 (^GSPC) earnings grew by an impressive 6% in the first quarter compared to the same period last year. When excluding dismal earnings from Bristol Myers Squibb (BMY), the results were even more robust, with earnings growing by a staggering 10%, as reported by Bank of America.
Earnings Growth Estimates on the Rise
This uptrend in earnings growth is not limited to the first quarter alone. Earnings estimates for future quarters are also on the rise. Consensus now expects earnings to grow by 11.4% in 2024, up from a previous projection of 10.9% as of April 5. For 2025, earnings growth estimates have moved up to 14.2%, representing an increase from the 11.6% growth seen on that same day.
Market Strategists Boost Year-End Targets
The outlook for the stock market is not just limited to earnings growth. Market strategists are also boosting their year-end targets for the S&P 500, citing stronger earnings as a key factor. On Tuesday, UBS Investment Bank US equity strategist Jonathan Golub increased his year-end target for the S&P 500 to 5,600 from 5,400, attributing this move to "stronger earnings."
Earnings Estimates Remain Robust
While subsequent quarter earnings estimates typically decline during earnings season, second-quarter estimates have been quite robust. This trend is also evident in full-year 2024 estimates, which supports further market upside. Golub noted that these trends all point towards further market gains.
Other Factors Contributing to Market Optimism
Earnings growth is not the only factor contributing to market optimism. Economic "tail risks" have declined, with consensus estimates for economic growth increasing throughout the year. This has led some strategists to boost their year-end targets even higher. Deutsche Bank chief global strategist Binky Chadha recently told Yahoo Finance that more economic growth than expected could help the S&P 500 reach 6,000 by the end of the year.
Earnings Growth Accelerating
Chadha noted that a large part of his current target of 5,550 is built around earnings growth that is accelerating and continues to accelerate. He believes that the earnings cycle has plenty of legs and will continue to drive market gains. While all the growth may not materialize this year, Chadha sees market confidence in a continued recovery rising by year-end, supporting equity multiples.
Big Tech’s Growth Remains Strong
Chadha had previously been looking for a rotation in earnings growth to begin in the first quarter, with Big Tech’s growth starting to slow and other areas catching up. However, this didn’t quite happen. A basket of stocks Chadha tracks labeled "Mega-Cap Growth and Tech" grew about 39% compared to the year prior, roughly flat from the 40% year-over-year growth seen in the previous quarter.
Not a Cause for Concern
Chadha believes that this strong growth is not an issue in itself. He believes that the robust earnings growth seen in this group, which includes the "Magnificent Seven" tech stocks among a few other big names like Netflix (NFLX), Visa (V), and Adobe (ADBE), is extremely likely to slow at some point.
Positive Developments Brewing
However, Chadha notes that there have been positive developments brewing under the surface in other pockets of the market. Earnings for cyclicals and defensives grew at a 7.5% clip in the first quarter, which Chadha noted is healthy. Other strategists believe a similar catch-up scenario is set to take place in earnings growth throughout the rest of this year.
Broadening Out
Bank of America US and Canada equity strategist Ohsung Kwon highlighted in a recent research note that Nvidia drove 37% of the S&P 500’s earnings growth in the first quarter. However, he believes that this trend is not sustainable and that the market will soon start to focus on other areas.
Cost-Cutting vs. Real Demand
Kwon noted that companies that beat estimates for revenue outperformed those that just beat estimates on earnings in the first quarter. This was a key trend that investors should keep an eye on throughout the year, as it points towards the market singling out companies that are increasing earnings through cost-cutting.
Market Trending Towards Real Demand
Josh Gordon, a reporter for Yahoo Finance, noted that the market tends to sniff out cost-cutting and say at some point, OK, now we have to actually see real demand come back online. This is a key trend that investors should keep in mind as they navigate the stock market.
Conclusion
In conclusion, the outlook for the stock market’s most important driver, earnings growth, continues to brighten. With earnings estimates on the rise and market strategists boosting year-end targets, it appears that the stock market is poised for further gains. However, investors should keep an eye on other factors such as economic "tail risks" and cost-cutting vs. real demand, as these trends will continue to shape the market in the coming months.
Key Takeaways
- Earnings growth continues to be a key driver of the stock market.
- Earnings estimates for future quarters are on the rise.
- Market strategists are boosting year-end targets, citing stronger earnings as a key factor.
- Economic "tail risks" have declined, with consensus estimates for economic growth increasing throughout the year.
- Cost-cutting vs. real demand is a key trend that investors should keep an eye on.
Sources
- FactSet
- Bank of America
- UBS Investment Bank
- Deutsche Bank
