The current price of the US stock market is the highest in almost two years. As businesses release their earnings in the upcoming weeks, their valuation may be put to the test.
After posting its best first-quarter result since 2019, the S&P 500 has increased over 9% year to date. But in order for stocks to continue growing at that rate, there may be more pressure for companies to produce impressive outcomes.
According to LSEG Datastream, the benchmark index is trading at 20.7 times its projected earnings for the upcoming 12 months, close to a two-year peak of 21.2 reached in late March. In a time when bonds are more appealing due to high Treasury yields, investors may have less incentive to stick with stocks as earnings growth is unremarkable.
Aside from companies' opinions on inflation and the economy, investors will also be listening to determine whether the so-called Goldilocks climate of steady growth and declining consumer prices will last.
In recent weeks, signs of persistent inflation have reduced expectations over the extent to which the US Federal Reserve will lower interest rates this year. Stocks increased on Friday's better-than-expected employment report.
Next week, a number of businesses, including JPMorgan Chase & Co., BlackRock, and Delta Air Lines, are expected to disclose their first quarter financial results. Investors will also be observing the US consumer price data for March, which is due on April 10.
LSEG data indicates that analysts anticipate a 5% earnings increase in the first quarter. That would represent the lowest since 2023's second quarter. They expect that high interest rates, growing commodity prices, and a slowdown in inflation will put pressure on business margins. The final quarter of 2023 saw an increase in earnings of 10.1%.
After the so-called Magnificent Seven stocks led the markets upward last year, there was a divergence in their share price performance. The performance of megacaps like Nvidia, Microsoft, and Meta Platforms could be crucial for investor mood.
Nvidia, a chipmaker, has increased its share price by 78% in 2024, whereas Tesla's shares have dropped by more than 30% as a result of worries about demand and profits. The electric vehicle manufacturer has shelved the long-promised low-cost automobile that investors were banking on to propel its expansion into a mass-market automaker.
Portfolio manager Bryant VanCronkhite of Allspring Global Investments said that these companies now have to justify these lofty valuations. Any business that wants to be competitive in the market has to be able to explain its demand drivers and future plans.
Investors will also be monitoring if signs of the US economy's resilience translate into increased profits and revenues for growth-related industries like energy and manufacturing. With a rise that has extended beyond technology and growth names, these firms' shares have generally done well this year.
Justin Menne, the head of US equities at Harbor Capital Advisors, who has excess shares of energy businesses, advised investing in real economy end-markets if the US economy continues to strengthen.
The chief investment strategist of Charles Schwab, Liz Ann Sonders, said that she anticipates "punishment" for businesses that fall short of expectations.
The Fed will remain a major concern for investors, as usual. A good earnings season and increased company price pressure could be interpreted as further proof that the economy remains too strong for the central bank to lower rates without running the risk of an inflationary resurgence.
The narrative was supported by the March US employment figures. Last month, nonfarm payrolls climbed by 303,000 jobs, far exceeding forecasts. Investor expectations on the futures markets indicate that the Fed will lower rates by about 70 basis points this year, as opposed to the 150 basis points that they had factored in January.
However, lower profits can point to weaknesses in the stability of the economy. That, according to some investors, might strengthen the case for the Fed to loosen monetary policy.
Kevin Mahn, the chief investment officer of Hennion & Walsh Asset Management, said that the market may benefit from this bad news since it could result in the Fed rate reduction that everyone is looking for.