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The stock market's loss of altitude in recent days has pushed some of the major indexes into 'correction' territory, raising hopes among some that the worst may be behind us. But there are others that cite various reasons to stay bearish, keeping alive questions about the market's next move. I am adding to that debate in this piece by pointing out a source of support for the market that will help not only stabilize, but actually rebound in the days ahead. Stocks need power to push higher, just as humans and machines do. For stocks, this 'power' comes from a variety of sources, but interest rates and corporate profits are the biggest sources. With respect to interest rates, we are clearly at an inflection point with the Fed geared up to stop inflation from establishing a firm foothold. The market expects the central bank to not only implement hefty interest rate hikes over the next couple of meetings, but also start shrinking its balance sheet that roughly doubled during the pandemic. The current market pullback is a reflection of market participants' uncertainty about the speed and magnitude with which the Fed will change interest rate policy in the days ahead and what impact those higher rates will have on the economy's health. The consensus view sees the Fed able to rein in inflationary pressures without causing an economic downturn (or a recession). But there are those that see rising risks to the economic outlook. A big part of the ongoing inflationary pressures in the economy is because of the pandemic's impact on global and local supply chains. The other part is a result of the stronger-than-expected post-pandemic demand that likely got exacerbated by stimulative fiscal measures. The Fed fully understands that no policy change on its part will have a bearing on stretched global supply chains. Its goal instead is to take the edge off excess demand by removing the extraordinary stimulus measures like ending the QE program and raising interest rates to a level where they are neither stimulating nor restricting economic growth. What this means is some further rise in benchmark interest rates as the Fed implements its policy. But the market has been pricing in this hawkish Fed outlook for some time, reducing the odds of big moves in market interest rates in the days ahead. I am not making light of this Fed policy change. This is a big deal, particularly for parts of the market that require a high degree of risk tolerance. Such investments, like stocks of small, high-growth companies with minimal current profitability, have been hit hard in the recent downturn. But the stock market is much more than just speculative operators or hyper-growth small companies whose profits lie out in future years. This brings us to the second force we mentioned earlier that powers stocks higher – corporate earnings. Corporate earnings enjoyed an impressive rebound last year, with each of the preceding three quarters generating all-time record tallies. This was despite continued pandemic-related issues in the broader leisure, hospitality and travel spaces. We knew that last year's impressive growth pace will decelerate this year and we are seeing that in the ongoing 2022 Q1 earnings season. That said, earnings are still growing, with Q1 earnings on track to increase +7.6%, with the growth increasing to +14.7% once Finance sector's results are excluded from the mix. Finance results at their core are good as well, but they are held down by non-cash reserves and tough comparisons to last year when the trading and investment banking businesses were literally on fire. Importantly, contrary to fears ahead of the start of this earnings season, most companies are providing favorable and reassuring outlook for their businesses, despite the well known headwinds of logistical bottlenecks and inflationary pressures that are weighing on margins. This is not only helping stabilize earnings outlook, but also easing worries about the economy. We strongly believe that investors will find it difficult to justify continued market weakness in the face of strong earnings releases in the days ahead. The market set up for this earnings season couldn't have been better. Continued . . . | ||||
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| With respect to the market, we should keep in mind that we don't need continuation of the outsized growth from 2021 to push stocks higher. What we do need, however, is an environment of improving earnings outlook, with estimates stable or steadily going up. And that's exactly what we have at present. We make the following two points in support of this view: First: The revisions trend has turned positive again, after modestly turning negative ahead of the start of the 2022 Q1 earnings season. What this means is that while estimates for 2022 Q1 had modestly come down after the period got underway at the start of January, we are seeing the opposite trend in play with respect to estimates for 2022 Q2 and beyond. Earnings for S&P 500 companies are currently expected to increase by +5.1% in 2022 Q2, which is up from +2.8% growth expected at the end of March 2022. We are seeing a similar favorable revisions trend for estimates for the second half of the year as well. Second: The above referenced favorable turn in the revisions trend is currently concentrated in the Energy and a few other sectors like Medical, Autos and Construction. But it is reasonable to expect this positive trend to spread to other sectors as the full extent of their earnings resilience comes through in their quarterly results. Looking at full-year 2022 earnings estimates, aggregate estimates have gone up by +3% since the start of January and by more than +1.7% since the start of April. In fact, full-year 2022 estimates for a number of sectors have started inching up since the beginning of April, after remaining under pressure during the first three months of the year. Positive revisions to Energy sector estimates are undoubtedly the biggest reason for keeping the net revisions trend in the green. But a strong case can be made that the recent turnaround in the revisions trend for the Transportation and Finance sectors in the wake of their Q1 earnings releases will in time expand to a number of the other sectors as well. In other words, the outlook for earnings is at a minimum very stable, if not altogether improving going forward. The fact is that there is no fundamental reason for stocks to lose ground as long as interest rates remain stable and earnings estimates maintain their current trend. The bottom line is that there is significant upside to current consensus earnings estimates. And an environment of rising earnings estimates and stable interest rates should keep stocks on an upward trajectory. Putting It All Together In the ongoing Q1 earnings season, companies are not only coming out with impressive results, but also providing positive guidance for the current period and beyond even as they explain the cost pressures and supply-chain challenges. Current estimates for this year and next represent strong earnings growth, but we remain very confident that the growth pace should continue to go up as a result of favorable estimate revisions. In fact, there is a strong likelihood that the outlook for economic and earnings growth will turn out to be a lot stronger than currently reflected in consensus estimates. Importantly, there is simply no signs of the doom-and-gloom scenario that some in the market are afraid of. The stock market's positive momentum is grounded in the fundamental reality of an improving earnings outlook and a very stable interest rate environment. While there are reasonable concerns about the interest rate backdrop given the Fed's current posture, we see no reasons to fear an unstable interest rate regime. All in all, an environment of stable earnings and interest rates is a market-friendly environment. How to Take Advantage Today is an ideal time to get aboard this market. That's why I'm inviting you to download our just-released Special Report 5 Stocks Set to Double. Each stock was handpicked by a Zacks expert as their personal favorite to have the best chance of gaining +100% and more in the months ahead: Stock #1: A Top Dog with Consistent Growth Stock #2: Technology that Could Drive the Next Decade's Innovation Stock #3: Recovery is in Full Swing Stock #4: A Small Player Says "No Thanks" to a Monopolist Stock #5: A Current Market Leader Set to Release Blockbuster Lineup The earlier you get into these new stocks the higher their profit potential. Previous editions of this report have racked up some huge gains. Examples include Boston Beer Co. +143.0%, NVIDIA +175.9%, Weight Watchers +498.3% and Tesla +673.0%.¹ To put the odds of success even more in your favor, you are also invited to look into our unique arrangement called Zacks Investor Collection. It gives you access to the picks and commentary from all our long-term portfolios in real time for the next 30 days. Plus, it includes Zacks Premium research so you can find winning stocks, ETFs and mutual funds on your own. Last year alone, they closed 68 double and triple-digit wins. There have already been 14 more in 2022. Gains have reached as high as +150.9%, +348.7%, and even +995.2%.¹ The opportunity to download this just-released Special Report, 5 Stocks Set to Double, ends midnight Sunday, May 1. Get started now with Zacks Investor Collection and 5 Stocks Set to Double » Thanks and good trading,
Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios. He invites you to access Zacks Investor Collection. | ||||
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| ¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through February 28, 2022. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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