Corporate America’s Surprising Profits Help Propel Stock Rally

(Bloomberg) -- With earnings season around two-thirds done, Corporate America is solidly beating expectations and Wall Street is ratcheting up its profit forecasts by the week. 

The brightening backdrop for the biggest US companies is helping sustain the stock market’s strength to start the year, and it’s also a far better scenario than analysts envisioned even early last month. At the time, there were still questions around how companies and consumers were dealing with high interest rates.

As it turns out, some 80% of S&P 500 Index companies reporting results this earnings cycle have surprised to the upside, handily exceeding the 10-year average of 74%, according to Bloomberg Intelligence data through Friday afternoon. Energy, information technology and consumer staples are among the sectors leading the way.  

Analysts are responding by lifting projections. Wall Street now sees fourth-quarter earnings growing 6.5% from a year earlier for S&P 500 members on average — which would be the best since mid-2022 — and up from a meager projection of 1.2% in early January, according to BI.

“People just continue to be surprised by how insulated earnings are, how insulated the consumer is and their propensity to spend and the narrative and tangible results coming out of AI,” said David Wagner, a portfolio manager at Aptus Capital Advisors LLC. So far “it’s a strong earnings quarter.”

Read BI’s analysis: S&P 500 Is on Track to Crush 4Q EPS Estimates

Tech behemoths Amazon.com Inc. and Meta Platforms Inc. have delivered some of the highest-profile upside surprises. But so did companies in other sectors. Colgate-Palmolive Co., Clorox Co. and Tyson Foods Inc., for example, exceeded expectations as well, to name a few.

To be fair, with so little baked into projections for S&P 500 members, the bar was low, and some strategists were saying weeks ago that Wall Street had gotten too gloomy. But the outcome is that companies appear to be building on the previous quarter’s earnings growth, which halted a three-quarter stretch of profit contraction.

What’s more, with confidence growing that the Federal Reserve will be able to tame inflation without triggering an economic downturn, the outlook may get even rosier.

“If we take out the tremendous winners and losers - I think everybody was surprised at the strength of Amazon’s results, and Meta - the rest of the earning season has been good,” said Kim Forrest, chief investment officer of Bokeh Capital Partners LLC. “I know that sounds tepid, but I’ll take it, because everybody last year at this time was banging the drum for recession and that does not look like what we have now.”

Given all the focus on the limited breadth of the market’s gains, investors have been scrutinizing the pricey artificial intelligence darlings particularly closely. All but one of the so-called Magnificent Seven have reported — with Nvidia Corp.’s results expected Feb. 21. With the exception of Tesla Inc., the group has shown resilient earnings growth, helping propel equities higher. 

There are also some key earnings releases ahead for consumer-linked stocks: Toymaker Hasbro Inc. reports next week, and Walmart Inc. is scheduled for Feb. 20. 

Of note, while large US companies may be doing better than forecast, smaller firms haven’t performed as well, in a potentially worrisome sign for how some parts of the economy are faring as traders push out bets on when the Fed will start lowering interest rates.

The share of negative earnings surprises among members of the Russell 2000 Index, the small-cap benchmark, is almost 38%, the highest since 2019, according to BI data. About 30% of the index’s members have reported. Investor demand for the sector has waned of late, after the gauge trailed the S&P 500 in January by the largest margin since March 2023, a reversal of the market move at year-end.

“We’re still a quarter away from earnings growth turning positive in the cyclical part of large cap and small and mid cap,” said Drew Pettit, a director of US equity strategy at Citigroup Inc. “It’s still a megacap earnings market.”

--With assistance from Katrina Compoli.

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