Investors are hoping for a stock market recovery in May after a disastrous April, but more bad news might be on the horizon. It’s important for investors to keep an informed view of current market and economic conditions. Analysis of the current market drivers in historical context provides a clear picture of what’s going on right now — and when it might change in the future. Keep this information in mind as you manage your investment portfolio for long-term growth.
1. Corporate earnings won’t stop the bleeding
The market is right in the thick of earnings season again, with about half of the S&P 500 left to report first-quarter results. Earnings were better than expected and strong overall in the fourth quarter, and those positive surprises helped to offset downward pressure on stocks. Things are less encouraging so far this time around.
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Most companies are still exceeding expectations, but there’s a clear slowdown in growth that’s impacting the stock market. The blended average earnings growth rate for the S&P 500 is around 7% so far, which is the slowest rate of expansion in nearly two years. It’s a sign that economic productivity is finally normalizing from the pandemic disruption.
Commentary about outlook for the rest of the year by CEOs isn’t great, either. Earnings guidance has been slightly negative overall, reflecting rising pessimism among corporate leadership. Investors, analysts, and executives all share concerns that the combination of inflation and rising interest rates is likely to hurt consumption and overall business activity. That’s bad news for sales, corporate profits, and stocks.
Those are all valid reasons for concern, but it’s important to recognize that the stock market is taking a beating despite receiving overall positive news from corporate earnings. Growth might be slowing, but it’s still well above historical averages, and it’s smashing the 5% rate of expansion that Wall Street was forecasting one month ago. Earnings season looks even better if we exclude Amazon, which is dealing with a tough combination of challenges right now. The S&P 500 would be growing more than double digits without the impact of the e-commerce giant. Even the headline-grabbing gloomy outlook is more lukewarm than outright threatening.
The stock market hit valuation levels that were only sustainable with support from spectacular corporate fundamentals. It was never realistic to expect huge growth figures indefinitely. Those sorts of results are no longer available, and 7% corporate earnings growth is being accompanied by a market correction.