Strong Earnings to Further Propel a Record Stock Rally

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Key Takeaways:

  • The S&P 500 is currently trading at 22X forward earnings. That’s one of its richest valuations and a whopping 20% above the market’s average forward earnings multiple of the past decade (about 18.5X).
  • Wall Street analysts have been revising their profit estimates higher across the board. That suggests increased confidence from those “in the know” that profit trends are improving across the economy.
  • Perhaps most importantly, with inflation pressures falling, the Federal Reserve should be compelled to cut interest rates over the next few quarters. Those rate cuts should reinvigorate U.S. economic activity and reenergize profit growth into 2025.
earnings - Strong Earnings to Further Propel a Record Stock Rally

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After a slow start to the summer, the stock market has recently surged to record highs. And many Wall Street strategists believe one thing can keep the party going all summer long – a strong second-quarter earnings season, set to begin this Friday. 

Now, at the moment, the market is expensive. The S&P 500 is currently trading at 22X forward earnings. That’s one of its richest valuations and a whopping 20% above the market’s average forward earnings multiple of the past decade (about 18.5X). 

Considering such a rich valuation, Wall Street needs a strong earnings season to push stocks to even higher highs. 

Fortunately, it looks like that is exactly what investors are going to get. 

As Go Earnings, So Go Stocks

As we’ve approached this earnings season, Wall Street analysts have been revising their profit estimates higher across the board. That suggests increased confidence from those “in the know” that profit trends are improving across the economy. 

Typically, when analysts broadly revise their estimates higher going into a reporting season, those earnings tend to be very good. 

Indeed, we think this earnings season will be very good. 

That’s because, while the economy isn’t in great shape right now, companies are spending hand-over-fist to build, test and deploy new AI products and services. And all that spending is creating huge tailwinds across the economy. 

At the same time, consumers are still spending and traveling. And inflationary pressures and real-time financing rates are both starting to fall. 

There seems to be enough economic ammunition for a strong earnings season. That’s why current estimates call for 8% profit growth across the entire S&P 500 this quarter. 

If companies do report strong growth, that should be good enough for a summer pop across the whole stock market. 

The Final Word

Now, perhaps most importantly, with inflation pressures falling, the Federal Reserve should be compelled to cut interest rates over the next few quarters. 

Those rate cuts should reinvigorate U.S. economic activity and reenergize profit growth into 2025. 

Indeed, S&P 500 profit growth is expected to steadily improve from about 8% this quarter to over 15% by the summer of 2025. That represents a huge profit growth ramp for the entire market over the next 12 months!

We expect that alongside that impressive growth, the stock market will do quite well. That’s exactly why we expect this record-setting market rally to continue for at least the next year. 

Therefore, it isn’t time to run away from stocks. It is time to run toward them. 

Check out a few of our favorite investment ideas to profit from this record-setting rally.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.

P.S. You can stay up to speed with Luke’s latest market analysis by reading our Daily Notes! Check out the latest issue on your Innovation Investor or Early Stage Investor subscriber site.


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