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Will Strong Earnings Boost Investor Confidence?

It’s a big week for news from corporate America. 

Earnings season is in full bloom, with roughly half of the companies in the S&P 500 index having reported their first-quarter earnings by now—and another one-third reporting this week.

So far, the news is good: Despite some signs of slowing economic growth last week, the S&P companies beating earnings estimates have done so by an impressive 9.1% on average—significantly higher than we’ve seen in recent quarters (see the chart).

S&P 500 Earnings Surprise by Quarter

Source: Bloomberg, calculations by Horizon Investments, as of 4/29/24

That strength, which investors appear to have increasingly come to expect, has helped buoy equity prices in the wake of the relatively weak GDP report, persistently sticky inflation, and a sharp rise in interest rates that have worried some investors. Both the S&P 500 and the Nasdaq posted big gains last week.

This week, we’ll see results from bellwethers Amazon and Apple as well as some key firms in the AI space (along with plenty of others). Strong earnings have served as a much-needed confidence booster for equity investors, especially given the increased possibility that inflation may prevent the Fed from cutting short-term interest rates soon. By this time next week, we’ll have an even clearer picture of corporate America’s health.

Meanwhile, we remain positive on the economy’s prospects. Although GDP growth was lower than expected during the first quarter, that outcome resulted largely from a wider trade deficit and a weaker buildup of inventories—not because consumers ran into trouble. Indeed, consumer spending during the quarter grew at a strong rate of 2.5%. In short, we believe the foundation for the economy’s growth remains healthy.

The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The Nasdaq 100 Index is a stock index of the 100 largest companies by modified market capitalization trading on Nasdaq exchanges. Index information is intended to be indicative of broad market conditions. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in any index. Information obtained from third party sources is believed reliable but has not been vetted by the firm or its personnel.

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