Lewis Krauskopf
NEW YORK (Reuters) – Highly valued U.S. stocks are keeping investors from being disappointed, raising bets ahead of the week when two more tech and growth giants report.
Strong earnings from Microsoft (NASDAQ:) and Google parent Alphabet (NASDAQ:) on Thursday helped the company’s stock post its biggest weekly gain since early November, following its first 5% decline of the year. The S&P 500 is up about 7% in 2024 and about 24% since the end of October.
But investors were punished by a disappointing forecast from Meta Platforms (NASDAQ:). Shares of Facebook’s parent company fell more than 10% on Thursday after the report. Sales warning sends shares of industry leaders higher Caterpillar (NYSE:) fell 7%.
More broadly, S&P 500 companies that beat analysts’ earnings estimates this quarter saw their shares outperform by an average of just 0.2%, JPMorgan strategists said. In contrast, stocks of those companies that missed earnings forecasts are underperforming by an average of 4%, the biggest underperformance in the last eight years.
Earnings reports were “pretty good,” said Rick Meckler, partner at Cherry Lane Investments. But “anyone who is missed in any way pays a pretty heavy price.”
More gains are expected in the coming week from the so-called “Magnificent Seven” group of companies that led markets higher last year. Amazon (NASDAQ:) will report on Tuesday, and Apple (NASDAQ:) will report on Thursday. On Wednesday, the Federal Reserve will release its latest monetary policy statement after completing its two-day meeting.
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Some believe the market’s almost unabated rise over the past six months has made investors less forgiving of earnings declines. The S&P 500 trades at 20 times forward earnings estimates, well above its historical average of 15.7, according to LSEG Datastream.
“We cautioned that the potential earnings boost may not translate into higher equities during earnings season, given the already strong equity gains ahead of earnings season and stretched positioning…” JPMorgan strategists said. “Indeed, the reaction in U.S. stock prices has been underwhelming so far.”
Tesla (NASDAQ:) shares rose 12% earlier this week after the company said it would introduce new models by early 2025. Some investors chalk it up to bargain hunting after this year’s painful sell-off, which has lowered the bar for good news significantly. . Tesla shares are still down more than 30% for the year.
Another factor could be rising Treasury yields. Projected future earnings of companies are discounted more heavily in analysts’ models when bond yields rise, because investors can now earn higher returns on risk-free government debt. The benchmark hit 4.74% this week, its highest level since early November, following new evidence of stronger-than-expected inflation.
Overall, however, 78% of S&P 500 companies beat analysts’ first-quarter earnings estimates, with earnings up 5.6% from a year earlier, LSEG IBES reported Friday.
Strong corporate results have become more important as rising Treasury yields and persistent inflation have added to uncertainty for stocks, said Chuck Carlson, chief executive officer of Horizon Investment Services.
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Corporate earnings are “reaching a level that can provide support to the market and to some extent overcome some of the inflation and interest rate fluctuations,” Carlson said.
Gains could be sidelined if bond yields continue to rise or inflation data comes in stronger than expected. While investors don’t expect any interest rate action from the Fed at next week’s meeting, they will be listening to the central bank on recent evidence of stronger-than-expected inflation.
Expectations for interest rate cuts, which had been a key driver of the rally, have faded following signs of economic growth and persistent inflation. Futures markets on Friday showed investors priced 2024 rate cuts of just 35 basis points, down from more than 150 basis points in January.
Earnings “were positive, but I would say the market’s biggest concern is inflation and what the Fed is going to do about it,” said Scott Wren, senior global market strategist at Wells Fargo Investment Institute.
(This story has been corrected to say in paragraph 10 that the benchmark 10-year Treasury yield hit 4.74%, down from 5.74% this week)