The Objective Advisor

With stock valuations elevated after such a strong first half, earnings growth will be key to holding, or potentially building on these gains. LPL Research believes stocks have gotten a bit over their skis, but earnings season may not be the catalyst for a pullback in the near term given all signs point to another solid earnings season and stocks have mostly performed well during the peak weeks of reporting season in recent years. We may not get an increase in second-half estimates over the next couple of months — that's a lot to ask — but we should get a few points of upside and double-digit earnings growth for the second quarter on the back of technology strength.

Return to Double Digits

Earnings season is right around the corner, with the big banks — JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) — scheduled to report on July 12. With the consensus expectations currently calling for a 9% increase in S&P 500 earnings per share (EPS), a double-digit gain for the first time since the fourth quarter of 2021 looks highly likely. That’s the main headline, but the sub-headline is the composition of that earnings growth.

Expect Double-Digit Earnings Growth in The Second Quarter

On October 12, 2022, there were very few comments suggesting that a new bull market was in thethroes of being born as the S&P 500 opened at 3,590.83 and closed at 3,577.03.

After all, inflation was still running hot even though the Federal Reserve (Fed) began its rate-hiking campaign on March 16, 2022, by raising rates by 25 basis points (0.25%) and moving to a 50-basispoint hike on May 5, 2022, as it tried to quell inflationary pressures. By mid-June, a series of 75- basis-point hikes were introduced as the Consumer Price Index (CPI) peaked in June at 9.1%.

The October 13 rally that ended the bear market at a low of 3,577.03 began with the S&P 500 selling off in the morning only to rally dramatically higher into the market close. The CPI report earlier in the day showed headline inflation at 8.2% on a year-over-year basis, but Core CPI ─ not including food and fuel prices ─ beat the consensus estimate at 6.6%. The S&P 500 closed at 3,669.91 and the bull market had commenced.

The Bear Gives Way to the Bull

The explanations for the market reversal that day traversed from excessive short covering to the deep pessimism embedded in the market psyche that allowed investors and traders alike to witness a modicum of improvement in the CPI report.

S&P 500 Maintains Its Growth Over the Last Year