Earnings Ascendancy: The New Vanguard of Market Growth

In the ever-evolving landscape of the stock market, focus has frequently shifted between interest rates, inflationary patterns, and market valuations. However, as we move into an era of adaptability to higher rates and moderated inflation, the spotlight is turning towards earnings. Portfolio Manager Jeremiah Buckley holds the view that earnings will be the pivotal factor for market growth.

Dissolving Myths: Rate vs. Valuation Correlation

The conventional wisdom purports that higher rates usually suppress market valuations. Yet, is this relationship as strong as we think? A critical observation indicates that even amid significantly heightened rates, we’ve witnessed multiple expansions this year. It’s worth noting, though, that these expansions have been propelled by a limited number of stocks.

The actual correlation between rates and market valuation can be gauged by looking back at the last 25 years of U.S. equity market behavior. Historical data shows that the P/E multiple on the S&P 500® Index often stays within the mid to high teens, irrespective of the federal funds rate being nearly zero or even rising to the 4%-5% mark.

Elevated interest rates can undoubtedly affect consumer and corporate demand. Still, our adjusted earnings forecasts for 2023 and 2024, reflecting these rate hikes, suggest equity multiples remain well within their historical parameters.

S&P 500 P/E, S&P 500 dividend yield, and Federal Funds Effective Rate
S&P 500 P/E, S&P 500 dividend yield, and Federal Funds Effective Rate
Source: Bloomberg,as at 16 August 2023. Data from 1 January 1998 to 16 August 2023.

The Engine of Growth: Earnings

While 2023 has seen market dominance by a select few tech giants, especially those poised to capitalize on AI, the real market mover in the forthcoming period is projected to be earnings growth.

Companies are aggressively gravitating towards productivity. This move is largely orchestrated by burgeoning investments in technology, especially AI, which is anticipated to streamline corporate expenses. The labor market’s health, an uptick in labor force participation, the normalization of supply chains, and the reduced costs of material inputs also underscore the potential for a robust earnings-driven market.

Yet, the journey ahead is not without its bumps. The economic terrain might get volatile, but the bullish sentiment regarding earnings growth remains unshaken. If a recession looms, it will be one of the most foreseen in history. The good news is that central banks hold ample ammunition to reinvigorate growth, if required.

The Hallmark of Success: Quality

With the tides of the market becoming increasingly intricate, the companies that stand out are those fortified with secular growth advantages. In such a climate, emphasizing high-quality companies is paramount. These entities, characterized by formidable capital structures and justified pricing power, are poised to lead the pack.

A robust balance sheet, consistent cash flows, and the ability to deliver value consistently set these companies apart. They possess the unique ability to adjust prices in response to inflationary pressures, ensuring profitability remains undeterred.

Conclusion

In the stock market’s complex matrix, while rates and valuations have their place, the emphasis is shifting. The true drivers of market performance are quality companies that can harness their strength in earnings. As we brace ourselves for the future, understanding and capitalizing on this perspective might just be the key to unlocking substantial growth.

Author:Com21.com,This article is an original creation by Com21.com. If you wish to repost or share, please include an attribution to the source and provide a link to the original article.Post Link:https://www.com21.com/earnings-ascendancy-the-new-vanguard-of-market-growth.html

Like (1)
Previous August 25, 2023 1:05 pm
Next August 29, 2023 1:04 pm

Related Posts

  • Navigating Uncharted Waters: The Impact of Rising Interest Rates on the Stock Market

    The financial world is currently swirling with various narratives, impacting market sentiment and performance. Amongst the whirlwind of corporate earnings, policy updates, and economic data, one particular development stands out – rising interest rates. This article examines how this trend could create headwinds for the stock market, potentially tempering bullish sentiment that has driven recent performance. Key corporate earnings results from heavyweights such as Apple (AAPL) and Amazon.com (AMZN) have taken center stage in the news. However, amidst this barrage of information, investors are increasingly preoccupied with potential challenges looming…

    August 3, 2023
    0
  • 2 AI Stocks To Consider In 2023

    AI stocks to watch in the stock market today. Artificial intelligence, or AI, is a rapidly evolving field that is transforming how we live, work, and play. Simply put, it’s a technological area that enables machines to mimic human intelligence—making decisions, recognizing patterns, understanding languages, and more. This powerful technology is already changing the face of several industries. This includes industries from healthcare and finance to entertainment and transportation, and its potential for future impact is vast. Hence, from an investment perspective, AI presents a broad array of opportunities. AI…

    June 14, 2023
    0
  • Navigating the Intersection: Steady Rates and a Hot Labor Market’s Impact on US Equities

    Introduction: As the US economy enters a new phase marked by steady interest rates and a scorching labor market, investors find themselves at a crucial juncture. The interplay between these two dynamics holds significant implications for equity markets, shaping investment strategies and risk assessments. In this article, we delve into the potential ramifications of steady rates and a robust labor market on US equities, exploring both opportunities and challenges in this evolving landscape. The Paradigm of Steady Rates: The Federal Reserve’s commitment to maintaining interest rates at a stable level…

    February 9, 2024
    0
  • 5 REITs to Buy for Passive Income in 2023

    Real Estate Investment Trusts (REITs) are a popular investment option for those seeking passive income. With the rise of online real estate platforms and the increasing demand for rental properties, REITs have become an attractive option for investors looking for steady and reliable income streams. In this article, we’ll highlight five REITs that are poised for growth in 2023 and offer attractive yields for passive income seekers. What is Real Estate Investment Trusts (REITs)? Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-generating real estate properties….

    December 16, 2022
    0
  • Understanding Company Acquisitions and Their Influence on Stock Prices: An Investor’s Guide

    When we look at the financial landscape, company acquisitions represent significant milestones that can dramatically shift the industry’s balance. An acquisition occurs when one company purchases another, usually with the intent to bolster its competitive position or enter a new market. It’s a fascinating and complex process that can significantly impact the stock prices of the involved companies. As an investor, it’s crucial to understand these dynamics to make informed decisions. At a fundamental level, an acquisition is a reflection of a company’s growth strategy. It’s a way to quickly…

    June 29, 2023
    0
  • Rising Underdogs: The Unstoppable Surge of Small-Cap Stocks in 2023

    The financial universe of 2023 has been dominated by tales of tech titans and the eye-watering growth of mega-cap stocks. With around ten of these giants responsible for the meteoric rise of the S&P 500® Index in H1 2023, it’s easy to think they’re the only show in town. But beneath the surface of these headline-grabbers lies an intriguing tale of smaller players – the small-cap stocks – preparing to take the lead. Is Narrow Leadership Fading? While mega-cap stocks had their moment in the spotlight, market analysts predict a…

    August 24, 2023
    0
  • 3 Things to Watch for if a Bull Market is Coming in 2023

    It’s no secret that stock, bond, gold, and silver markets have been on a roller coaster ride in recent months, leaving investors with plenty of uncertainty. Despite the current market volatility, many experts are forecasting a potential bull market in 2023. If you’re a long term investor or looking to capitalize on a potential bull market, here are 3 things you should watch for in the coming months. Analyzing Past Bull Markets In order to better assess the potential for a bull market in 2023, it’s important to analyze past…

    January 21, 2023
    0
  • Reading the Charts: MACD’s Bearish Warning for US Stocks

    In the financial world, data-driven decisions have always proven to be effective. As the adage goes, “numbers don’t lie.” And recently, these numbers have been sending some cautionary signals, particularly in the stock market. Let’s delve deep into the numbers, trends, and most significantly, what the MACD is telling us. The Backdrop The current economic landscape has its fair share of hurdles: looming rate hikes, a recent downgrade of the US credit rating by Fitch with an attached warning on bank ratings, concerns over China’s economic growth, and stock prices…

    August 25, 2023
    0
  • Shifting Tides on Wall Street: Why the Retreat of Market Skeptics Should Be Your Signal to Worry

    There’s a curious trend afoot on Wall Street, one that may be a harbinger of things to come. After months of surprisingly resilient market performance, a capitulation among the bearish big-name investors has begun to emerge. This change in tune comes just as the market has started to falter. The timing and nature of these developments should warrant concern for those paying attention to the financial markets. The Changing Tide: Bears Retreating The June and July short-covering among Goldman Sachs’ hedge fund clients has been the most significant over a…

    August 10, 2023
    0
  • Why Dividend Stocks Are a Smart Investment Choice for 2023

    It’s no secret that the stock market has been unpredictable in recent years, and with the global economy still recovering from the impact of the Coronavirus pandemic, it can be difficult to know where to invest your money. One option that has been gaining popularity is investing in dividend stocks. Dividend stocks are a type of stock issued by a company that provides a stream of regular payments, or dividends, to its shareholders. These payments can be an attractive source of income for investors, particularly in times of market volatility….

    January 22, 2023
    0

Leave a Reply

Your email address will not be published. Required fields are marked *