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Muted Response in Stocks Even As S&P 500 Company Earnings on Pace for Best Quarter Since 2010

Companies in the S&P 500 index are on pace to post the highest earnings growth rate in more than seven years, but stocks have yet to take a cue from the earnings momentum.

Through April 27, 53% of companies in the S&P 500 had reported first quarter earnings, according to FactSet. Seventy-nine percent of companies reporting have posted earnings-per-share (EPS) that have beaten analysts’ forecasts – on track to be the highest percentage of S&P 500 companies reporting EPS above expectations since FactSet began tracking this metric in the third quarter of 2008.

The blending earnings growth rate for those companies in the S&P 500 that have reported is 23.2% year-over year. If it remains at that level it would represent the best earnings growth since the third quarter of 2010, according to FactSet.

The solid earnings season has yet to provide a spark to stocks, with the exception of some sectors of the market like technology shares. Through April 30, the S&P 500 is up by just 0.27% since the second quarter began and still down by 1.0% since the beginning of the year. It’s a similar story for the Dow Jones Industrial Average, which has gained only 0.25% this quarter, but has declined by 2.2% since the year began. (See Links for Stock Data)

“The stock market has been generally moving sideways for weeks. Investors aren’t taking advantage of the strong earnings because there’s also a lot of potentially negative news out there, between tariffs, the prospect of the Fed acting more aggressively, and so forth,” Jon Maier, chief investment officer at Global X Funds, told MarketWatch in this May 1 article.

Indeed, more companies are talking about tariffs. Of the 162 company conference calls for first-quarter earnings analyzed by FactSet, 45 mentioned tariffs – 19 of those in the industrial sector, the highest among the S&P 500’s 11 industry sectors. While 25 companies anticipated little to no impact from tariffs on future earnings, 19 expressed concerns about the potential for tariffs to have negative impacts on customers, inflation and the overall economy in future quarters.

Competition from Other Asset Classes?

Stocks have also gotten recent competition from fixed income securities with the benchmark 10-year Treasury note recently piercing through the 3.00% mark in late April for the first time in more than four years. Since then the 10-year note has settled lower, yielding around 2.97% as of May 1.

And with the PCE index of prices compiled by the Commerce Dept. recently charting at 2.0% – thus, reaching the Federal Reserve’s inflation target – the central bank is likely to maintain its path of raising interest rates this year or even more aggressively if it considers inflation to be a threat to economic growth.

Previous rate increases by the Fed, expectations of more to come, and rising confidence in the economy have contributed to higher yields for Treasury securities and other fixed income assets, leading investors to consider rotating out of stocks. As of April 27, the dividend yield on the S&P 500 was 1.95%, below that of the two-year Treasury note (see below).

Two-year Treasury notes have risen to nearly 2.50% this year, while shorter-duration investment-grade corporate bonds are yielding above 3.00%. “Investors can earn positive after-inflation returns from these bonds for the first time since the global financial crisis,” Blackrock Investment Institute said in its April 30 Global Weekly Commentary.

“Investors no longer need to take on as much risk to generate enough return to preserve purchasing power,” Blackrock said, noting that a lack of lower-risk income sources since the financial crisis had forced investors toward riskier assets, raising demand amid relatively fixed supply. The result, according to Blackrock: higher stock prices and tighter spreads (or less premium required over safe government debt) for high-yield and emerging market bonds, for example.

Now, with the rise in short-term yields, risk assets closest to Treasurys have been among the first asset classes to reprice. “Rising rates, increased economic uncertainty and the return of market volatility have driven the spreads on other perceived ‘safe’ short-dated assets, such as IG [investment grade] credit, wider,” Blackrock said. “This has made such assets more attractive.”


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