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Better than feared first quarter earnings results will power the stock market to new highs, Fundstrat says

Tom Lee

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  • Better than feared earnings results will power the stock market’s ongoing rally, according to Fundstrat’s Tom Lee.
  • Of the near 20% of S&P 500 companies that have reported earnings so far, 79% beat profit estimates by a median of 6%.
  • “We think demand and margins holding up better will support a rally in technology stocks,” Lee said.

Better than feared earnings results are poised to power the stock market rally further to new highs this year, according to Fundstrat’s Tom Lee.

While only about 20% of S&P 500 companies have reported first-quarter results so far, they’ve been better-than-feared, with 79% of companies beating profit estimates by a median of 6% and 63% of companies beating revenue estimates by a median of 4%.

And the absolute earnings results aren’t all that bad so far, with first-quarter earnings per share tracking to be down just 1.2% year-over-year on sales growth of 7.3%, according to Fundstrat. While the muted earnings growth could continue into the second or third-quarter of the year, Lee highlighted that for stocks, that might not be a problem.

“The nadir in year-over-year earnings per share growth continues to be tracking to 2Q23 (maybe 3Q23) and for those keeping tabs, historically equities bottom 11-12 months before earnings per share bottoms. Hence, this would be supportive of October 2022 representing the low,” Lee said. 

The big test for earnings will come next week when mega-cap tech giants like Amazon, Alphabet, and Microsoft report results. Lee has high hopes for tech stocks to beat earnings results given their strong year-to-date rally, with the technology sector posting the strongest performance so far this year despite recent weakness in April.

“We see technology reversing this recent weakness as we move through first-quarter results season,” Lee said. “We think demand and margins holding up better will support a rally in technology stocks… Technology could be the winner of results season.” 

Lee isn’t the only Wall Street strategist that sees continued strength in the latest batch of earnings. BMO chief investment officer Carol Schleif said in an e-mail to Insider that there have been “no major red flags” in earnings results.

“What we’ve learned from earnings reports so far is that companies are rightsizing their business models amid concerns about the economy, and that reduction in costs is helping to keep profit margins afloat, which is a metric that stock investors are laser focused on right now,” Schleif said.

And as long as earnings can continue to beat investor expectations, Lee expects stocks to push to new highs this year.

“We think 1Q23 earnings season will ultimately enable the S&P 500 to push to new highs for the year,” Lee said. 

Read the original article on Business Insider
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