Strong earnings fuels market optimism | Luminor

Strong earnings fuels market optimism

  • The stock market reached a new all‑time high
  • The return of meme mania1
  • Earnings drive the bull market

Among many factors to follow, markets most probably have focused the most on inflation and the path of central bank cuts so far this year. Despite investors appearing uneasy the factors such as earnings, margins, and yields have all contributed to stock markets reaching the new all time high levels. However, distractions like the meme stock rally, hawkish remarks from central bank officials, and disappointing economic data could derail the prevailing optimism going forward. 

As a result, developed markets’ equities (measured by MSCI World index) have risen 2.9%, while emerging markets’ equities (measured by MSCI Emerging Market index) declined 0.76%. During the same period yields on bonds have decreased slightly, with 10‑year US Treasury bond yields declining to 4.5% from 4.68% a month ago, meanwhile German 10‑year Treasury bond yields rising to 2.65% from 2.59% a month ago.     

The stock market hit a new high

The stock market's post‑pandemic peak occurred just a few days into 2022, following a surge in stock prices throughout 2021 driven by stimulus and economic reopening. This uptrend ended in 2022 in the wake of significant worsening of geopolitical risks, coupled with rising inflation. Stocks fell more than 25% in 2022, hitting their lowest point in October, as markets stabilized from the peak in inflation and gained confidence that the central banks are done with inflation‑beating interest rate increases. The new bull market that began in October 2022 has faced setbacks, mainly due to concerns over the central banks keeping rates high for longer. Nevertheless, the S&P 500 has returned nearly 52% since then, rising more than 10% in 2024, alone. While much of the market's rise since 2022 has been driven by significant gains in the technology sector (especially the "Magnificent 7" and AI enthusiasm), the rally has recently started to broaden. This shift could be a positive sign for the longevity of the bull market. In recent weeks, leadership has emerged from cyclical sectors like industrials and financials, as well as more defensive and rate‑sensitive sectors like utilities.

MSCI ACWI Net Return EUR2

Source: Investing.com

Meme stocks that peaked in 2021 were back in the headlines

During the month we saw echoes of 2021 and a reminder of another peak—the speculative frenzy that brought about the rise of "meme stocks." Shares of GameStop and AMC made a comeback in the headlines after significant price spikes. AMC shares notched the biggest gain since January 2021 and despite AMC's shares surging by over 100% in just a few days, this increase is barely noticeable when compared to previous levels, highlighting the considerable drop from their highs during the speculative bubble in 2021. While it may not signal a return to the same level of speculation or investor sentiment seen during that period, it does suggest the risk‑taking behavior is typical during strong market uptrends.

Rising earnings keep the bull market intact

Earnings season is nearing its end – with almost all of the S&P 500 companies having already released results, the earnings season is nearly complete. Many of the investor eyes were paying a close attention to NVIDIA since the company is the third largest stock by market capitalization of the USA’s S&P 500 index, and it is at the epicenter of AI development. The NVIDIA first‑quarter earnings report highlighted that the company continues to see strong demand for its AI chips across multiple sectors and regions. Earnings were up over 461% from a year ago, while guidance for the second quarter exceeded analyst forecasts. Perhaps most importantly, CEO Jensen Huang highlighted that generative AI is expanding to sectors like automotive and health care, beyond the core cloud‑service customers. For the rest of the market‑listed companies, a strong but gradually slowing economy is supporting healthy revenue growth, while profitability is improving as the increase in input costs is moderating. The key takeaway is that rising earnings provide a strong foundation for the uptrend in stocks to persist.

Market view

While primary uncertainty around the Fed (Federal Reserve) policy outlook and likely upcoming worries around the U.S. presidential elections could be catalysts for volatility in the months ahead, corporate earnings remain in a solid uptrend, supporting the market gains. There is no doubt that both the stock and bond markets will continue to be influenced by expectations of future central bank policy. This should be a pillar of broader support, especially given the expectations for lower rates sometime this year. However, upcoming inflation readings are unlikely to consistently meet expectations, which is likely to introduce bouts of volatility as the market speculates on the timing of a potential rate cut.

1A meme stock refers to the shares of a company that have gained viral popularity due to heightened social sentiment. This social sentiment is usually due to activity online, particularly on social media platforms. (Investopedia)

2The MSCI ACWI Index captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,840 constituents, the index covers approximately 85% of the global investable equity opportunity set. (msci.com)

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