FA Alpha Daily

Earnings growth, duh

Amidst the complexities of the current market, earnings growth remains the paramount driver for Wall Street. As AI continues to reshape industries, its impact on efficiency and earnings growth becomes increasingly profound. In today’s FA Alpha Daily, we explore how the rise of AI and record-high EPS forecasts are boosting the S&P 500, with analysts’ optimism poised to push the market even higher.

FA Alpha Daily:
Monday Macro
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In the world of Wall Street, investors focus on one thing above all else, earnings growth…

For as many other trends as these folks pretend to care about, it all boils down to this one factor.

If the credit market freezes up, companies go bankrupt… which hurts earnings growth.

The rise of AI is so powerful because it’s helping companies become more efficient… which boosts earnings growth.

The stock market cannot sustainably rally without earnings growth. That’s why last year was such an anomaly.

U.S. earnings fell 9% thanks to higher inflation and interest rates cutting into earnings. And yet, the S&P 500 rallied 24%.

If the market keeps rising at its current pace, this year could be even better. The S&P 500 is already up 15%. We’re only about halfway through the year.

And unlike in 2023, this year’s rally seems to be backed up by—you guessed it—earnings growth…

We can see this through Wall Street analyst forecasts for quarterly earnings per share (“EPS”).

Analysts provide estimates for just about every public stock. The biggest stocks, like those trading on the S&P 500, tend to have the most coverage.

If you’ve followed our work for a while, you know we don’t look to Wall Street for buy-and-sell recommendations.

However, we recognize that these analysts are paid to be experts on the companies they cover. Their one- to two-year earnings forecasts tend to be pretty accurate.

So when it comes to forecasting the next several quarters of as-reported EPS… Wall Street can be a useful indicator.

The following chart shows Wall Street’s EPS expectations for the entire S&P 500 over the next four quarters. As you can see, analysts expect EPS to reach an all-time high over the next year…

Estimates previously peaked in September 2022. Now, Wall Street expects the biggest companies to beat their old record.

Those lofty expectations could be reason enough to keep the market rallying.

While the credit market remains tight, it doesn’t seem tight enough to stop refinancing activity. And if companies can still boost earnings, the market should keep rising in kind.

After all… it’s all about earnings growth, duh.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research

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