With earnings season round two-thirds completed, firms are solidly beating expectations. Some 80% of S&P 500 firms reporting outcomes this earnings cycle have stunned to the upside, handily exceeding the 10-year common of 74%, in response to Bloomberg Intelligence information by Friday morning.
Analysts are responding by lifting projections. Wall Road now sees fourth-quarter earnings rising 6.5% from a yr earlier for S&P 500 members on common — which might be one of the best since mid-2022 — and up from a meager projection of 1.2% in early January, in response to BI.
“The fourth-quarter earnings season has been stronger than anticipated, giving traders confidence that the wholesome financial system may proceed driving company earnings,” stated Arthur Hogan at B. Riley Wealth.
Nonetheless, regardless of all of the optimism, warnings a couple of stretched market preserve piling, with the S&P 500 buying and selling above “overbought” technical ranges.
“We stay cautious,” stated Dan Wantrobski at Janney Montgomery Scott. “On this entrance, we notice narrowing of breadth, ongoing divergences in momentum, overbought circumstances in management areas, and sentiment that may method extremes comparatively shortly.”
Michael Hartnett at Financial institution of America Corp. says {that a} speedy rally that despatched U.S. shares on a record-setting spree is now near triggering a number of promote alerts.
The financial institution’s customized bull-and-bear indicator rose to six.8 within the week by Feb. 7, Hartnett wrote in a notice. A studying above 8 would counsel the bullish development has run too far, flashing a contrarian sign to promote, the strategist stated.
“Bear positioning in 2023 was markets’ finest good friend,” Hartnett stated. However after traders purchased the S&P 500 throughout final yr’s 24% rally, that publicity is “flipping from tailwind to headwind.”
He cautioned that “in bubbles, markets present little respect for positioning,” or for valuation. “They solely respect coverage and actual rates of interest,” he stated.
To Bret Kenwell at eToro, whereas shares could also be a bit overheated for the time being, it doesn’t imply the markets are about to go off the rails.
“Whereas it might ultimately result in some revenue taking within the brief time period, that is nonetheless a bull market. Till we see materials weak spot within the financial system, it’s exhausting to get bearish on shares,” Kenwell famous.
“Regardless of some issues about banks tightening lending requirements just lately, the U.S. financial system nonetheless seems to be to be making an attempt a tender touchdown,” stated Don Rissmiller at Strategas. With inflation remaining tame, “Fed fee cuts are possible later in 2024,” he added.
Market-implied expectations for Fed fee cuts this yr continued to cost in a quarter-point transfer in June and a complete of 4 this yr. Subsequent week, consumer-price index information for January is anticipated to point out additional slowing, which Fed officers have stated is a situation for pivoting to cuts after 11 fee will increase over the previous two years.
Expectations for a heavy slate of recent company bonds focused on Monday — forward of the January CPI information — was one other issue for Treasury yields to push increased Friday.
To Krishna Guha at Evercore, the U.S. CPI revisions introduced “no ugly surprises,” which ought to add to the Fed’s confidence that inflation is heading sustainably again to the two% goal — and ticking another field on the street to fee cuts.
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