The uncertainty surrounding the timing of potential Fed interest rate cuts and the impact of the Federal Reserve holding interest rates at a 23-year high has been a major concern for the stock market. Despite these concerns, the recent earnings reports have delivered strong results, supporting the upward momentum of the stock market. With about two-thirds of the S&P 500’s quarterly reports released, companies are beating earnings per share projections by an average of six percentage points, compared to the usual three percent beat seen by S&P 500 companies. This positive trend has been driven by improved profit margins, as companies have focused on cost-cutting and efficiency.
While the earnings reports have been positive, there are signs of weakness. Weak demand continues to be a concern, impacting revenue numbers that are barely surpassing estimates. Companies that fail to meet Wall Street’s earnings and revenue expectations are facing steeper stock price declines, with an average drop of 4.3% the day after the disappointing results, compared to the typical 2.4% drop. This suggests that market sentiment has improved, but earnings expectations remain high, resulting in harsher penalties for companies that fall short.
On the positive side, the overall market sentiment has shown significant improvement in recent months, but valuations remain high. Companies that do not meet earnings estimates are being penalized more severely, signaling that the bar for success is set at a higher level. Despite the strong performance of earnings, concerns about weak demand continue to linger, suggesting that while the market sentiment has improved, the expectations for companies remain stringent.