The Market Has Run. So Have Earnings.
It is easy to look at the stock market today and say it has already moved a long way. That would be true. The S&P 500 has had a strong run, valuations are elevated, and investor expectations are no longer sitting on the floor.
FactSet shows the forward 12-month P/E for the S&P 500 at 21.4, above both the 5-year average of 19.9 and the 10-year average of 18.9. Since the end of the first quarter, the price of the index has risen 14.9%, while the forward 12-month EPS estimate has risen 5.8%. In plain English, the market has paid up for future earnings. It has not quite put dinner on a credit card, but it has definitely ordered dessert.
The important question is whether earnings are showing up to support that move. So far, they are.
According to FactSet, with 91% of S&P 500 companies reporting Q1 results, 84% have beaten earnings estimates and 80% have beaten revenue estimates. The blended earnings growth rate for Q1 is now 27.7%, up from an expected 13.0% at the end of the quarter. If that 27.7% number holds, it would be the highest earnings growth rate for the index since Q4 2021 and the sixth straight quarter of double-digit earnings growth.
A market trading above its normal valuation range needs earnings to do some of the heavy lifting. This quarter, earnings are doing exactly that. Revenue growth is broad, earnings revisions are moving higher, and margins are not just holding up, they are expanding. All eleven sectors are reporting year-over-year revenue growth, while ten of the eleven sectors are reporting year-over-year earnings growth.
The economy underneath those numbers, however, is not moving evenly. It is increasingly split between the companies and consumers with resources, pricing power, scale, and access to capital, and those without them.
The lower-end consumer is showing cracks. Higher food costs, higher insurance, higher borrowing costs, and higher rent are not theoretical pressures. They are monthly bills. At that level of the economy, the margin for error has narrowed.
The stock market, however, is not the lower half of the consumer economy. The S&P 500 is heavily influenced by the “haves”: companies with fortress balance sheets, dominant platforms, global scale, and exposure to the largest investment cycles in the world. That is where much of the earnings growth is coming from.
Information Technology is the clearest example. FactSet shows the sector reporting 51.0% year-over-year earnings growth, the highest of all eleven sectors. Semiconductors and semiconductor equipment are showing 100% earnings growth, with NVIDIA and Micron listed as the largest contributors. If those two companies were excluded, Technology’s earnings growth would fall from 51.0% to 28.8%. That is still impressive, but it tells you how concentrated the engine is.
The revenue side tells the same story. Technology revenue is growing 29.2%, again the highest of any sector. Every industry inside Technology is showing year-over-year revenue growth, led by semiconductors at 52%, hardware at 28%, electronic equipment at 24%, software at 19%, communication equipment at 16%, and IT services at 8%. If Technology were excluded, S&P 500 revenue growth would fall from 11.4% to 9.0%.
Communication Services is another example of the same divide. The sector is reporting 48.9% earnings growth, but that number leans heavily on Alphabet and Meta. Without those two companies, Communication Services would be showing an earnings decline of 4.3% instead of growth of 48.9%. That is not a small adjustment. It is the difference between a strong sector and a weak one.
Even Consumer Discretionary, the sector most likely to reflect consumer pressure, is not one clean story. The sector is reporting 39.8% earnings growth, helped by Amazon, Ford, and General Motors. At the same time, parts of the sector are clearly less healthy. FactSet shows Household Durables earnings down 26% and Textiles, Apparel, and Luxury Goods down 17%. The winners are large enough to pull the sector higher, even while more consumer-sensitive pockets are weaker underneath. Like most economic data, it is less of a clean story and more of a family Thanksgiving where everyone technically belongs in the same room, but not everyone is having the same experience.
Margins also support the case that this is not simply a market running on enthusiasm. The blended net profit margin for the S&P 500 in Q1 is 14.7%, above last quarter’s 13.2%, above the year-ago margin of 12.8%, and above the five-year average of 12.3%. If that number holds, FactSet says it would be the highest net profit margin since it began tracking the metric in 2009.
Strong earnings do not remove the market’s other risks. They just give the market a better cushion. Oil is one of them. FactSet noted that “Middle East” was cited on 211 S&P 500 earnings calls, the highest number in at least ten years, with companies discussing the potential impact of higher oil prices and freight costs. So far, most companies have not taken down guidance because of it, but if oil stays elevated long enough, it can work its way into inflation, margins, and consumer spending. Markets can ignore higher oil for a while. They are less good at ignoring it when it starts sending invoices.
The Fed is another risk. Investors have been expecting the next move to be lower rates, not higher ones. If inflation proves sticky and the Fed is forced to raise instead of cut, that would challenge the market’s current valuation. The same is true if the 10-year Treasury yield pushes back toward 5%. At that level, bonds become more competitive, equity valuations come under pressure, and investors start doing actual math again, which is always a dangerous development on Wall Street.
This is the kind of market where allocation matters. Broad exposure may not be enough if the leadership is coming from specific areas of the economy, and sitting too defensively can create its own risk if earnings keep pulling the market higher. If you would like to talk through how your portfolio is positioned, or whether it has the right exposure to the companies and themes driving this market, please call me at 661-302-4531 or email me at jeremiah.bauman@lpl.com.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.