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Move over interest rates, it\u2019s time for corporate earnings to fuel the next leg of the record-breaking stock market rally.<\/p>\n
Wall Street strategists are optimistic that Corporate America will deliver another bumper earnings season as global economic growth picks up. Even pricey technology stocks \u2014 the primary profit engine in the previous quarter \u2014 are again expected to be supported by solid results. So while the S&P 500 Index is coming off its\u00a0best first quarter in five years<\/a>\u00a0and continues to trade near its all-time high, market experts are reluctant to bet against further gains.<\/p>\n \u201cIt\u2019s way too early to apply the brakes on the US stock rally,\u201d said Manish Kabra, head of US equity strategy at Societe Generale SA. \u201cThe momentum has been backed up by the earnings outlook, and I expect that to continue for at least one more quarter.\u201d<\/p>\n Kabra is among a\u00a0slate<\/a>\u00a0of Wall Street strategists who have\u00a0boosted<\/a>\u00a0their year-end forecasts for the S&P 500 in recent weeks.<\/p>\n Earnings for S&P 500 companies are expected to post a \u201chealthy\u201d 10% gain in the first quarter in headline numbers from a year ago, according to Deutsche Bank AG strategists led by Parag Thatte. And earnings upgrades from analysts have outnumbered downgrades in the first quarter, according to a Citigroup Inc. index.<\/p>\n \u201cThere\u2019s a likelihood that Q1 earnings season is still going to be pretty strong, especially given just how strong economic growth was in the first quarter,\u201d said Cayla Seder, macro multi-asset strategist at State Street.<\/p>\n The rising profit forecasts lessen worries that that the broad equities benchmark is in a bubble. After a 9% rally this year, S&P valuations are well above their 20-year average and the index is already about 4% higher than the average target of strategists tracked by Bloomberg last month.<\/p>\n Meanwhile, investors are buying in, as allocations to stocks have surged since an October low on the back of upbeat projections for economic growth, according to Deutsche Bank. Exposure is now expected to flatline as companies go into a blackout period for stock buybacks ahead of the reporting season. But the levels are not high enough to warrant a selloff in the absence of a negative catalyst, a team at the firm led by Thatte wrote in a note.<\/p>\n Other strategists concur. Confidence among equity investors is at the highest in nearly two years, but sentiment is still far from the \u201ceuphoric\u201d levels that typically signal a top, Bank of America Corp. strategist Savita Subramanian said earlier this month.<\/p>\n \u201cWhen we talk about sentiment, my underlying view is that whether sentiment is really negative or whether sentiment is really positive, sentiment can stay in either direction so long as the information circumstance is as it is,\u201d said Citigroup strategist Scott Chronert.<\/p>\n There is, of course, skepticism brewing among some market participants after Federal Reserve officials last week raised the possibility of keeping interest rates high for longer than expected. Those\u00a0comments<\/a>\u00a0sparked the biggest one-day selloff in the S&P 500 in almost two months last Thursday. The volatile week also prompted long-complacent traders to\u00a0look at the hedges<\/a>\u00a0they\u2019ve ignored for months.<\/p>\n The stock market\u2019s tepid start to April has led JPMorgan Chase & Co. clients to question whether the rally has peaked and if the recent price action portends something \u201cmuch worse in the economy,\u201d said Andrew Tyler, head of US market intelligence at the bank, in a note. However, he isn\u2019t convinced.<\/p>\n \u201cI think none of these,\u201d Tyler wrote to clients. \u201cIt is possible that we could see a 2-3% pullback, but you need to see either deterioration in the macro story or an earnings season that shows negative sequential growth.\u201d<\/p>\n The reversal in stocks on Friday following a hotter-than-expected US jobs report also shows how eager traders are to buy into any pullback.<\/p>\n Additionally, forecasts for tech earnings remain strong, with analysts expecting the sector to report that profits soared 20% in the first quarter. At the same time, the outlook for the more economically sensitive sectors is brightening, suggesting a broader, healthier rally as the laggards catch up.<\/p>\n For Charlie Ashley, portfolio manager at Catalyst Capital Advisors LLC, the stock market\u2019s fate hinges on these projections.<\/p>\n \u201cMultiples are extended right now, so earnings strength needs to continue,\u201d Ashley said. \u201cIf there is softness in earnings, that\u2019s going to be a warning signal because that\u2019s likely followed by a weakening US consumer and a weakening economy.\u201d<\/p>\n<\/div>\nSubscribe to the CFO Daily newsletter to keep up with the trends, issues, and executives shaping corporate finance. Sign up<\/a> for free.<\/div>\n