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S&P 500 rockets to new highs as earnings beat estimates

Key points

  • A diverse group of S&P companies, including Uber, CVS, ConocoPhillips, Hershey and Disney, beat analysts’ earnings outlooks in recent days, boosting investor confidence.
  • Technology stocks, including Microsoft, Apple, Qualcomm and Intel, contributed significantly to the overall rise in index gains.
  • Market sentiment is bullish, with the SUP up 3.2% since January 19, but the index’s forward P/E indicates prices may be moving higher.
  • 5 stocks we like better than Alphabet

Better-than-expected earnings growth is driving the S&P 500 to new highs. The rally is driven by a diverse group of companies, including Uber Technologies Inc. New York Stock Exchange: UBERCVS Health Corp. New York Stock Exchange: CVSConocoPhillips New York Stock Exchange: COPHershey Company Inc. New York Stock Exchange: HSY and Walt Disney Co. New York Stock Exchange: DISall beating analysts’ earnings estimates.

The latest earnings reports from the S&P 500 companies, as a group, have exceeded expectations. The SPDR S&P 500 ETF Trust NYSEARCA: SPY

According to research from data analytics firm FactSet, there has been a marked improvement in the S&P 500’s earnings per share since January 19.

“The main reason for the improvement in earnings is that more companies have beaten EPS estimates and by a wider margin after January 19 compared to before January 19,” wrote FactSet’s John Butters.

He added that as of Jan. 19, collectively, S&P 500 companies had reported actual earnings that were 17.8% below estimated earnings.

Large Financial Companies Missed EPS Views

Financials, which are typically among the first companies to report fourth-quarter results, “accounted for most of this below-average performance relative to estimates,” Butters wrote.

For example, JPMorgan Chase’s earnings reveal that the financial giant missed earnings forecasts by 69 cents per share. The stock has risen since its January 12 report.

Wells Fargo & Co. New York Stock Exchange: WFC earnings missed views by 86 cents per share. Wells Fargo shares have declined since its Jan. 12 report and are trading slightly higher in the weeks since.

On the positive side, insurance giant Chubb Ltd. New York Stock Exchange: CB was one of the S&P financial stocks that reported a positive earnings surprise. Because it comes from an unglamorous corner of the financial sector, Chubb doesn’t get much attention, but the stock is up 8.43% in the past month, outperforming the broader market.

10 S&P sectors report positive results

Since FactSet’s Jan. 19 earnings estimates, more companies representing the other 10 S&P sectors have reported quarterly results. With these new results, the index’s performance relative to estimates has improved.

Between January 19 and February 5, according to FactSet, 75% of S&P 500 companies reported actual EPS above estimates. Collectively, S&P 500 companies have reported actual earnings that beat estimates by 7.3%.

“As a result, ten of the eleven sectors now have higher earnings growth rates (or smaller earnings declines) today compared to January 19, led by the information technology, energy, healthcare and consumer sectors. discretionary,” according to FactSet.

Technology stocks were the biggest contributors to earnings growth, with positive earnings surprises coming from tech titans like Microsoft Corp. NASDAQ:MSFTApple Inc. NASDAQ:AAPLQualcomm NASDAQ:QCOM and Intel Corp. NASDAQ:INTC.

Energy, healthcare and consumer stocks beat EPS forecasts

Among energy stocks, companies with positive earnings surprises included Exxon Mobil Corp. New York Stock Exchange: XOMMarathon Petroleum Corp. New York Stock Exchange: MPC and Chevron Corp. New York Stock Exchange: CVX.

The healthcare sector is the third-largest contributor to this profit increase, accounting for about $2.4 billion of the $16 billion net profit increase, according to FactSet.

Pfizer Inc. New York Stock Exchange: PFE continues to lag the Health Care Select Sector SPDR Fund NYSERCA: XLV and the S&P 500 overall, but managed to beat earnings expectations by a good margin when it reported on January 30.

When it comes to consumer discretionary stocks, Amazon.com Inc.’s earnings NASDAQ:AMZN beat analysts’ views by 19 cents per share, contributing significantly to the S&P’s overall earnings increase.

From the communications services sector, Meta Platforms Inc. NASDAQ: META and Alphabet Inc. NASDAQ:GOOGL beat analysts’ profit forecasts for the fourth quarter. Because they are so weighted in the S&P 500, they contributed significantly to the index’s overall gains since January 19.

Bull market sentiment, but be careful

Rising earnings across the S&P 500 have not only defied previous forecasts but also sparked a wave of bullish sentiment among investors, with the SPDR S&P 500 ETF Trust NYSEARCA: SPY up 3.2% since the close on January 19.

Although analysts forecast strong earnings growth for many S&P companies, keep in mind that cost cuts, the polite term for layoffs, have been responsible for some of the earnings growth. I would prefer to see revenue increases as the key factor, which it still is, in many cases.

Furthermore, the S&P is up 21.81% in the past year. There may be more room to run, but it is typical to see a pullback after a 20% to 25% rally.

Overvaluation may become a problem in the not-too-distant future: according to Yardeni Research, the S&P 500’s forward price-to-earnings ratio is 20.4. That doesn’t mean there will be a correction tomorrow, but it is something investors should keep an eye on even as earnings growth remains strong.

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