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US Corporate Earnings Falter: Can They Fuel the 2023 Stock Rally?

As the U.S. enters the latter half of 2023, stock investors are eyeing corporate earnings with cautious optimism, questioning if the current momentum can fuel the stock rally further. The situation presents a multifaceted picture that requires a closer look.

Wall Street sign
Wall Street sign

Investors' Satisfaction Amid Mixed Results

Stock investors have been generally content with moderate U.S. corporate results this year. However, as 2023 continues, their demands might rise. With the second-quarter earnings season nearing its conclusion, S&P 500 results present a contrasting scenario, highlighting both gains and pitfalls in revenue and profits.

Expectations and Anticipation in the Market

Although the S&P 500 has edged higher, investors are awaiting a pick-up in corporate profits. The U.S. economy has thus far resisted recession concerns, but investors may be less lenient if companies underperform later in 2023. Rising equity valuations add to this complex environment, amplifying expectations.

Analyzing Second-Quarter Earnings

Second-quarter earnings are predicted to have dropped 3.8% compared to the previous year, according to Refinitiv IBES data. This follows a marginal rise in the first quarter and a decrease in the last quarter of 2022. Improvements are expected in upcoming quarters, with optimistic forecasts for 2024.

S&P 500 Valuations: A Richer Picture

The S&P 500 has become more highly valued, with its P/E ratio above the long-term average. This year's expansion in valuation accounts for a substantial part of the S&P 500's year-to-date return, indicating that valuations are outpacing fundamentals.

Second-Quarter Results: A Closer Look

With most S&P 500 companies having reported their second-quarter results, many beat analysts' expectations. However, revenue beat rates are at their lowest since early 2020. Stock reactions to earnings have been lukewarm, reflecting a shift in market sentiment.

High-Profile Performances and Upcoming Reports

Apple's weak sales forecast and investor responses to other major companies like Amazon and Alphabet have shaped market perceptions. Key retailers' results in the coming week, along with monthly retail sales data, could further sway the markets.

Economic Outlook and Recession Concerns

Investors are generally positive about the economic outlook but remain cautious about potential recession due to higher interest rates and other warning signs. A downturn could drastically alter corporate earnings prospects and weigh on valuations. The optimism persists, but the risks must not be overlooked.