The Major Force Driving Stocks

Many investors are looking for a fundamental reason for continued optimism about stocks in the wake of the market's startling decline at the top of this week. Investors need only look at corporate earnings, a major driver of stocks, which are expected to deliver that reason in the form of  fourth-quarter earnings reports in the coming days.

"What we're hearing is unambiguously positive," as Stephen Parker, head of thematic equity solutions at the JPMorgan division of JPMorgan Chase & Co. (JPM), told CNBC. More specifically, the consensus among analysts is that companies in the S&P 500 Index (SPX) will, as a group, deliver Q4 2017 earnings that are 13% above the same period in 2016, CNBC reports. Meanwhile, a recent research note from Deutsche Asset Management, as quoted by Bloomberg Businessweek, calls a parallel global trend in earnings upgrades "unusually spectacular." (For more, see also: 5 Reasons the Bull Market Will Thrive in 2018.)

Upward Bound

"Not only is this quarter strong on an absolute basis, but unlike past quarters, we don't see the sort of analyst revisions downward that you traditionally would always see leading into fourth-quarter earnings," as Parker also told CNBC. More than 25% of the S&P 500 companies had reported earnings, and 80% of those reports had exceeded analysts' projections, per data from Thomson Reuters cited in CNBC's January 28 report.

For stocks in the MSCI All Country World Index, analysts are issuing earnings upgrades at the fastest pace in more than 10 years, per Bloomberg. In fact, from 2008 through 2016, analysts steadily reduced their earnings estimates as each year progressed, per Bloomberg's analysis. However, 2017 represented a reversal of trend, with earnings estimates being upgraded throughout the year, as actual results repeatedly exceeded expectations. So far in 2018, upgrades are being issued at an even faster clip than in 2017, Bloomberg indicates.

Big Week for Earnings

More than 100 S&P 500 companies and 10 Dow Jones Industrial Average (DJIA) constituents are scheduled to report this week, CNBC adds. These corporations have a combined market value in excess of $9 trillion, and include such big names as, per CNBC: Facebook Inc. (FB), Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), McDonald's Corp. (MCD), Boeing Co. (BA), AT&T Inc. (T) and Exxon Mobil Corp. (XOM).

"We like secular growth stories like technology and healthcare, and we like cyclical value stories like banks and energy," Parker told CNBC, which he describes as a "barbell approach" to the market that JPMorgan favors whether or not a correction actually occurs in the near future. Longer term, JPMorgan expects the bull market to continue, and Parker recommends "buying any kind of weakness." 

Sustainable Global Growth

In the U.S., corporate tax cuts and deregulation are factors in the bright earnings picture, but Bloomberg suggests that these may fade as driving forces later in the year. More important for corporate earnings and stock prices, both worldwide and in the U.S., is synchronized global economic growth. "Every major economy on earth is expanding at once," as The New York Times reports. "The fact that global growth is spread gives you more assurance that this is more sustainable," as Barret Kupelian, a senior economist with PricewaterhouseCoopers told the NYT. (For more, see also: 4 Reasons the Stock Market's Outlook Is Bright: Goldman.)



Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.