The S&P 500 is on track for the best quarterly earnings growth since 2009 as companies smash expectations

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Company earnings have consistently beaten Wall Street estimates in the second quarter.

S&P 500 companies are on track for the best earnings growth since 2009, with companies smashing estimates as the US economy bounces back to life from COVID-19 lockdowns.

The strong quarter is helping support stocks despite high equity prices, rising inflation, and the threat of the delta coronavirus variant.

Earnings for S&P 500 companies are expected to grow 78.1% year-on-year in the second quarter, according to figures from financial data company Refinitiv, released Friday. That would be the best quarterly performance since the final three months of 2009, during the initial rebound from the financial crisis.

Around a quarter of the 500 companies that make up the benchmark US stock index have reported. Those in the industrial, consumer discretionary, and financial sectors are set to do the best as they profit from the reopening of the economy and favorable comparisons to last year’s weak second-quarter earnings.

So far, 88% of S&P 500 companies have beaten earnings per share estimates for the second quarter, according to data provider FactSet.

The strong results put the S&P 500 on track to be the best quarter for beats since FactSet started tracking the data in 2008. The current record was registered in the first quarter of 2021, when 86% of companies beat estimates.

Read more: GOLDMAN SACHS: 33 stocks to buy right now for strong returns of at least 15% and minimal risk as the economic reopening helps equities grind higher into year-end

And companies are raising their expectations for earnings and sales as the economic rebound continues. For example, Coca-Cola stock jumped on Wednesday when it increased its revenue and earnings outlook, citing the strong economy.

Investors have not reacted strongly to the second-quarter earnings, given that the S&P 500 has already soared more than 90% since its pandemic-induced crash in March 2020.

But the strong earnings are helping the benchmark US stock index hover at record highs.

JPMorgan analysts, led by Dubravko Lakos-Bujas, on Tuesday upgraded their year-end target for the S&P 500 from 4,400 to 4,600, which would be roughly a 5% increase from Friday’s level.

The index “should be supported by strong earnings growth and capital return until 2023,” Lakos-Bujas and colleagues said in a note.

Importantly for investors, profit margins are strong despite rising inflation and some reports of higher costs. John Butters, senior earnings analyst at FactSet, said net profit margin for the S&P 500 for the second quarter is expected to be 12.4%.

“If 12.4% is the actual net profit margin for the quarter, it will mark the second-highest net profit margin for the index since FactSet began tracking this metric in 2008, trailing only last quarter’s net profit margin of 12.8%,” he said.

Yet, there are risks ahead, not least the fact that the coronavirus pandemic is far from over. Delta variant cases have soared in Britain, and survey data suggests the numbers are slowing the country’s economic recovery.

Cases are now on the rise again in the US, contributing in part to a sharp sell-off on Monday, which saw the S&P 500 drop 1.6% and the Dow Jones fall 2.1%.

However, many investors are hoping high vaccination rates can keep advanced economies ticking over. Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a note: “We see reasons to look beyond the delta variant headlines and stay risk-on, with a tilt toward reflation and reopening beneficiaries.”

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The S&P 500 will tumble as much as 10% in the summer as growth peaks, Deutsche Bank predicts

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The S&P 500 is due a correction, Deutsche Bank said.

  • The S&P 500 will fall between 6% and 10% in the summer before rebounding, Deutsche Bank predicted.
  • The bank’s analysts said rising inflation may unsettle investors, while earnings growth would cool.
  • Investors have become more cautious about US stocks, with many strategists looking towards Europe.
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The S&P 500 is likely to drop as much as 10% in the summer as economic growth peaks and investors lose their nerve, Deutsche Bank has said.

The benchmark US stock index has risen more than 15% so far this year. That has taken it to 4,344, already putting it above Wall Street analysts’ average year-end target of 4,276, as compiled by CNBC.

Deutsche Bank strategists on Tuesday said investors had gotten ahead of themselves and that they expected the index to fall between 6% and 10% in the summer.

The strategists, led Marion Laboure, said one concern is economic growth is likely peaking after the rapid rebound from the COVID-19 pandemic.

Read more: A weaker economy and stronger dollar threaten to sink the S&P 500 by 11% and send bitcoin tumbling to $12,000, Stifel strategists warn. Here are the 9 industries they recommend hiding in for the rest of 2021.

Laboure and the team said analysts are unlikely to keep upgrading companies’ earnings forecasts, which has been boosting stocks. And they said inflation remains a risk which could unsettle investors, after prices growth hit a 13-year high in the US in May.

However, the Deutsche strategists said the 6% to 10% drop should be a healthy correction for US stocks. “We then see equities rallying back as our baseline remains for strong growth but only a gradual and modest rise in inflation,” they wrote in Deutsche Bank’s quarterly “House View” report.

Investors have become more cautious on US stocks as of late, after a rapid rally in the first few months of the year. Many strategists are looking towards Europe as a place to find more affordable stocks that can benefit from a rebound in the global economy that will help sectors such as financials.

JPMorgan Asset Management said in its mid-year outlook that it expects stocks to rise in the second half of the year, but said investors should expect a bumpier ride as inflation worries “contribute to the jitters.”

Analysts at Barclays said in a recent note: “We believe that concerns over peaking global growth, inflation risk, and a hawkish [Federal Reserve] derailing the market are overstated.

But they said they were only “grudgingly” positive about stocks, given equity prices have already risen sharply in 2021.

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A technical indicator is signaling that the S&P 500 will soon hit new all-time highs, Fundstrat’s Tom Lee says

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  • New advances in one technical indicator suggest that the S&P 500 is due for a new all-time high, Fundstrat’s Tom Lee said.
  • The advance/decline line hit an all-time high on Friday. The market breadth indicator leads the S&P 500, he said.
  • The index opened just 0.5% from an all-time high on Tuesday.
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A technical indicator that measures market breadth is signaling to Fundstrat’s Tom Lee that the S&P 500 will soon hit new all-time highs.

The benchmark index has been “flat” since April 16, as it touched 4,191 that day and closed on Friday at 4,204. However, a technical indicator called the advance decline line gained 1,247 points during the same time period, and hit a new all-time high on Friday.

“Historically, the advance/decline line leads the overall index,” said Lee in a Tuesday note.”Thus, surging to new ATH on 5/28/2021 presages the overall S&P 500 to advance higher. ”

The advance decline line rises when stock advances exceed declines and falls when declines exceed advances. According to Lee, it’s showing that market internals are marching to new highs.

He also explained that the S&P 500 may look weaker than the advance decline line suggests because of mega-cap technology stock weakness. Technology stocks are down 4% since April 16.

Lee reiterated Fundstrat’s base case forecast that the S&P 500 will reach 4,400 by “mid-2021,” a roughly 4% gain from current levels.

The S&P 500 hit an all-time high on May 7 of 4,238.04. On Tuesday morning, the index opened just 0.5% shy of that high.

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5 reasons the S&P 500 could slump for the rest of 2021 despite strong profit growth and economic optimism, according to Bank of America

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US corporations have been issuing positive guidance on profits and economists continue to upgrade their GDP estimates as optimism on the economic recovery accelerates. But this isn’t necessarily a good sign for the stock market, Bank of America said.

A team of BofA strategists recently raised their 2021 earnings estimate to $185, but maintained their expectations for relatively flat stock gains for this year. The firm has a year-end price target of 3800 for the S&P 500, a nearly 8% pullback from current levels.

Here are five reasons why investors should “curb their enthusiasm” and brace for flat returns from stocks in 2021, according to Bank of America.

1) Sentiment

Wall Street bullishness is rising to near-euphoric levels, as seen by BofA’s contrarian sell-side indicator. Their indicator is less than a point away from indicating overextended optimism on Wall Street and flashing a sell signal.

2) Valuation

The current valuation of the S&P 500 indicates “paltry” returns over the next decade, said the strategists.

“Valuation is almost all that matters over the long-term,” BofA said. “With the increase in valuations in April, this framework yields 10-yr price returns of just 2%/year (versus 5% in Nov., and 10% 10 years ago).”

3) Outsized Returns

The S&P 500 posted 12 month returns of over 54% through March 2021, which was the third highest 12-month return on record since 1936. It was also 2.3 standard deviations above average. BofA data shows that losses have historically occurred for the next 12 months when the S&P 500 makes a 2+ standard deviation move like this.

4) Overshoot in fair value

One of BofA’s fair value models forecasts the S&P 500 to hit 3635 by year-end. “This is based on our 2022 cyclically-adjusted earnings forecast of $173 and our equity risk premium (ERP) forecast of 425bp by year-end (vs. 398bp today) as 2H shifts to concerns about peak earnings and peak stimulus,” said the firm.

5) Elevated Risk Appetite

A contrarian signal that measures the return on investments given the risk an investor takes has dropped to dangerously low levels, BofA added. In the two most recent instances that equity risk premium dropped below 400 basis points, the S&P 500 posted 10% and 20% peak to trough declines.

Against this backdrop, the strategists recommend investors buy cyclical stocks, small-caps over large-caps, and stocks that hinge on strong GDP and an expansion in capital expenditures.

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A worryingly large number of US stocks are expensive, crowded, and pose a downside risk to the S&P 500, says Bank of America

Traders and financial professionals work ahead of the closing bell on the floor of the New York Stock Exchange (NYSE) from Getty Images
  • Mega-cap growth stocks are overcrowded, expensive, and dampen the outlook for the S&P 500 in 2021, BofA said. 
  • A team of strategists said in a Friday note that bullish sentiment and high valuations indicate risk in the stock market. 
  • With the S&P 500 set for flat returns this year, BofA favors value stocks, small-caps, and cyclicals.
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Mega-cap growth stocks are vulnerable to a downturn that could weigh on the whole S&P 500 index, according to Bank of America.

A team of strategists led by Savita Subramanian said in a Friday note that large-capitalization growth stocks – assets which make up a large chunk of the US market – are expensive and crowded, even when accounting for historically low interest rates. 

Stocks are forward-looking instruments, and investors attribute the record rally in stocks during the COVID-19 pandemic to the fact that equities were anticipating future growth. However, Bank of America said that some stocks, particularly those within large-cap growth “overshot,” future growth estimates.

Now, “bullish sentiment, lofty valuations, massive dispersion between rich and cheap stocks, and no rewards for EPS beats all indicate risk,” the strategists said.

All of this has led Bank of America to a 2021 year-end price target of 3,800 for the S&P 500, a slight decline from current levels. 

This doesn’t imply that 2021 won’t be a positive year for the economy, however. With the vaccine rollout underway, a large fiscal stimulus about to be passed, and impressive earnings beats, BofA economists are forecasting 6.5% US GDP growth this year.

The strategists emphasized that the S&P 500 isn’t a pure reflection of the economy-it’s more global, more levered to capex than consumption, has operating leverage, and has more exposure to technology, media, and telecommunications than the broader economy. Therefore, while the S&P 500 will remain flat for this year, profits and economic growth will be strong.

Against this backdrop, the strategists reiterated their recommendation for cyclical and small-cap stocks. They also said value stocks look attractive.

Read more: A CIO who earned up to 90% per trade during last year’s crash is now warning of a potential 20% crash in the S&P 500 by the end of March as 10-year Treasury yields continue to rise

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