- US stocks have withstood interest rate uncertainty so this year, with the S&P 500 up by more than 6%.
- Stocks have held up even as analysts have cut 2023 S&P 500 earnings expectations by the most in years.
Stock investors have been knocked around this year as they confront a higher-for-longer scenario for interest rates, but equities have managed to advance as investors see corporate America's largest companies capable of posting relatively solid future earnings, according to DataTrek.
"If you want to know why US stocks remain resilient in the face of renewed interest rate uncertainty …. stable earnings expectations is the single best answer," Nicholas Colas, co-founder of DataTrek Research, in a note published Monday.
The S&P 500 so far in 2023 has gained more than 6% in uneven monthly performances at the start of the year. The index was around 4,078 on Monday. January kicked off with a rally, then stocks slumped in February, and in March, they were moving upward again. Hotter-than-anticipated inflation data and an unexpectedly strong January jobs report spurred investors to start pricing in expectations for the Federal Reserve to push its benchmark interest rate up to 5.75%.
DataTrek said Wall Street analysts in the first two months of this year have chopped down their S&P 500 earnings estimates for 2023 by 3.4%, outstripping the long-run average of 1%. But the cuts weren't deep as in 2015 or 2016, two other years where markets were concerned about a looming recession. Analysts in 2015 cut earnings expectations by 5.1%, and by 4.4% in 2016.
"Let's say that analysts are being their usual overly optimistic selves and their Q1 2023 estimate is the right number for the rest of the year," wrote Colas. "That still works out to $205/share ($51.15/share times 4), or 26 percent higher than the 2018 – 2019 pre-pandemic average S&P earnings of $162/share. The S&P 500 is up 25 percent from the end of 2019," he wrote.
"Yes, interest/discount rates are higher but without a material deterioration in earnings expectations that dynamic plays second fiddle to a stable outlook for earnings," he said.
Colas noted that investors were a little more than a month away from the start of the first-quarter earnings season, during which they will learn more about a potential turnaround in corporate-profit trends.
"The good news is that markets likely discount Wall Street analysts' optimistic forecasts as much as we do," said Colas, adding that all the market may need to see to hold current levels is the S&P 500 holding quarterly earnings power of $50-52/share through the rest of 2023.
"The bad news is that this only describes why stocks can tread water here – not why they should rally. For that, we need to a see an end to Fed rate hikes," Colas said.
The Federal Reserve is expected to deliver its ninth straight rate hike on March 22. The Fed funds rate currently stands in a range of 4.5%-4.75%.