In a surprising turn of events, Corporate America is outperforming expectations during this earnings season, contributing to a robust stock market rally. With approximately two-thirds of earnings season completed, major US companies are reporting profits that exceed Wall Street forecasts, presenting a much more optimistic scenario than anticipated just a month ago. The resilience is notable considering initial concerns about how businesses and consumers would navigate high-interest rates.
According to Bloomberg Intelligence data, approximately 80% of S&P 500 Index companies have reported results that surpass expectations, well above the 10-year average of 74%. Leading the way in this unexpected surge are sectors such as energy, information technology, and consumer staples.
Analysts are responding by revising their projections upward. The current outlook suggests a 6.5% year-over-year growth in fourth-quarter earnings for S&P 500 members on average, a significant improvement from the modest 1.2% projection in early January.
Tech giants like Amazon.com Inc. and Meta Platforms Inc. stand out with high-profile upside surprises, alongside companies from various sectors like Colgate-Palmolive Co., Clorox Co., and Tyson Foods Inc.
Despite initial skepticism and a low bar set for S&P 500 projections, companies seem to be building on the previous quarter’s earnings growth, breaking a three-quarter stretch of profit contraction. Growing confidence in the Federal Reserve’s ability to manage inflation without triggering an economic downturn further contributes to the optimistic outlook.
However, the positive trend is not uniform across the market. While large US companies are exceeding expectations, smaller firms, particularly reflected in the Russell 2000 Index, haven’t performed as well, raising concerns about some segments of the economy. Almost 38% of the Russell 2000 Index members have reported negative earnings surprises, the highest since 2019. This discrepancy underscores the ongoing challenges in certain economic sectors as traders adjust their expectations for the Federal Reserve’s future actions.
In the midst of this mixed landscape, investors are closely monitoring key earnings releases, with toymaker Hasbro Inc. reporting next week and Walmart Inc. scheduled for February 20. Despite the potential disparities, the overall sentiment in the market remains buoyant, defying previous recession fears and presenting a more optimistic economic landscape than expected.
