Recent earnings estimate increases have given confidence that any pullbacks in this extremely overbought market should be viewed as buying opportunities. Higher odds of an interest rate cut by the Federal Reserve this year are helping justify stock valuations. It is important to note that the S&P 500 Short Range Oscillator is currently overbought, similar to what was seen back in December before a pullback of about 2%. This week, some selling was done to raise cash just in case a decline occurs once the current momentum dies down. Trimming of certain holdings, such as Morgan Stanley and Palo Alto Networks, was done following recent rallies. However, the big question remains: How deep of a decline could be coming once the current momentum slows down?
Looking at earnings estimates for the 11 S&P 500 sectors, it was found that three out of the top five weighted sectors saw their 2024 earnings estimates revised higher, while five of the bottom six sectors saw downward revisions. Since the end of the first quarter, upwards earnings revisions have been seen in four of the top five sectors, including the financial sector, showing an improved outlook for U.S. corporate earnings compared to 45 days ago. Real estate estimates have remained stable, indicating a broadening market supported by a better earnings outlook. This positive trend has been backed by cooler inflation reports and a stable growth and inflation environment, reducing expectations for Fed rate cuts.
While stock price-to-earnings valuations matter in the long term, underlying earnings estimate revisions have a greater impact on near-term price action. The current market dynamic appears to be fundamentally driven, with stock price appreciation supported by the improved corporate earnings outlook. Any pullbacks in the market should be expected to be relatively shallow, providing buying opportunities. However, if stock prices move higher while estimates are either unchanged or revised lower, caution should be exercised as the move may be based on momentum and multiple expansion, which is not sustainable.
The upward earnings estimate revisions reflect an improved outlook for corporate earnings, which is a primary financial metric used to value equities. This supports stock price appreciation and suggests that any working off of the overbought market should not be concerning. Pullbacks should be viewed as chances to buy, as the market is supported by the fundamentals. The timing of a Fed rate cut remains uncertain, but easing is seen as the next move by central bankers, supporting multiples as investors anticipate earnings growth. Overall, the improved earnings outlook and fundamental support indicate a positive market environment with opportunities for investors.
