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With earnings season round two-thirds finished, firms are solidly beating expectations. Some 80% of S&P 500 firms reporting outcomes this earnings cycle have shocked to the upside, handily exceeding the 10-year common of 74%, in accordance with Bloomberg Intelligence knowledge via Friday morning.
Analysts are responding by lifting projections. Wall Avenue now sees fourth-quarter earnings rising 6.5% from a yr earlier for S&P 500 members on common — which might be the perfect since mid-2022 — and up from a meager projection of 1.2% in early January, in accordance with BI.
“The fourth-quarter earnings season has been stronger than anticipated, giving buyers confidence that the wholesome economic system may proceed driving company income,” stated Arthur Hogan at B. Riley Wealth.
Nonetheless, regardless of all of the optimism, warnings a few stretched market maintain piling, with the S&P 500 buying and selling above “overbought” technical ranges.
“We stay cautious,” stated Dan Wantrobski at Janney Montgomery Scott. “On this entrance, we notice narrowing of breadth, ongoing divergences in momentum, overbought situations in management areas, and sentiment that may strategy extremes comparatively shortly.”
Michael Hartnett at Financial institution of America Corp. says {that a} speedy rally that despatched U.S. shares on a record-setting spree is now near triggering a number of promote indicators.
The financial institution’s customized bull-and-bear indicator rose to six.8 within the week via Feb. 7, Hartnett wrote in a notice. A studying above 8 would counsel the bullish development has run too far, flashing a contrarian sign to promote, the strategist stated.
“Bear positioning in 2023 was markets’ finest buddy,” Hartnett stated. However after buyers purchased the S&P 500 throughout final yr’s 24% rally, that publicity is “flipping from tailwind to headwind.”
He cautioned that “in bubbles, markets present little respect for positioning,” or for valuation. “They solely respect coverage and actual rates of interest,” he stated.
To Bret Kenwell at eToro, whereas shares could also be a bit overheated in the mean time, it doesn’t imply the markets are about to go off the rails.
“Whereas it might ultimately result in some revenue taking within the quick time period, that is nonetheless a bull market. Till we see materials weak spot within the economic system, it’s exhausting to get bearish on shares,” Kenwell famous.
“Regardless of some considerations about banks tightening lending requirements lately, the U.S. economic system nonetheless seems to be trying a mushy touchdown,” stated Don Rissmiller at Strategas. With inflation remaining tame, “Fed charge cuts are probably later in 2024,” he added.
Market-implied expectations for Fed charge cuts this yr continued to cost in a quarter-point transfer in June and a complete of 4 this yr. Subsequent week, consumer-price index knowledge for January is anticipated to indicate additional slowing, which Fed officers have stated is a situation for pivoting to cuts after 11 charge will increase over the previous two years.
Expectations for a heavy slate of latest company bonds targeting Monday — forward of the January CPI knowledge — was one other issue for Treasury yields to push larger Friday.
To Krishna Guha at Evercore, the U.S. CPI revisions offered “no ugly surprises,” which ought to add to the Fed’s confidence that inflation is heading sustainably again to the two% goal — and ticking another field on the street to charge cuts.
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