Last week’s Q1 earnings were impressive – so impressive that they may have started a big stock market rally.
The ad businesses at Meta and Alphabet are rebounding for the first time since 2021. Alphabet and Microsoft’s cloud businesses are finally starting to stabilize, too. And thanks to aggressive cost-cutting measures, profit margins across all three businesses are expanding as well.
Those headline earnings reports were great.
But underneath them, the news was just as good.
Q1 Earnings Season Continues to Impress
We’re about halfway through the first-quarter earnings season. Just over 260 companies in the S&P 500 have reported numbers so far.
Pretty much all are beating estimates – and by a wide margin.
On average, sales numbers are clocking in about 2% above estimates. Earnings are coming in about 7% above expectations.
That latter number is very impressive. At 7%, the average earnings beat “size” this quarter is the biggest since the middle of 2021. It’s also about 10X the size of the previous quarter, when companies were topping profit estimates by just 0.7%, on average.
And even more importantly, earnings trends are improving.
Throughout 2022, earnings growth rates kept deteriorating. In the first quarter of 2022, earnings growth was running at 10%. In the second quarter, it dropped to 7%. It fell to 3% in the third quarter. And by Q4, it slid all the way to -3.5%.
But here in Q1 of 2023, the earnings trend has reversed. The earnings growth rate has improved to a drop of just 1.7%.
For the first time since 2021, earnings growth trends are finally improving.
That’s especially meaningful because as go earnings, so go stocks.
The Final Word
Just look at the following chart. When earnings rise, stocks rise. When earnings fall, stocks rally. The correlation is very strong.
This Q1 earnings season confirmed that earnings should start moving higher now. If they do, then stocks will rise, too.
From here, we think stocks can soar into, throughout, and beyond the summer, powered by a combination of strong earnings, falling inflation, and a dovish shift in Fed policy.
It’s time to buy for this upcoming rally.
If you’re interested in buying stocks that could soar 100%, 200%, even 300%-plus over the next eight months alone, we have just the stocks for you.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.