Investors may have underestimated strong S&P 500 quarterly earnings — Seaport strategist
In the United States, investors may have insufficiently accounted for the strength of second-quarter financial results of S&P 500 companies, according to Patrick Palfrey, head of portfolio strategy at Seaport Research Partners. As MarketWatch reports, earnings per share for companies in the index rose by 55%, and by 35% excluding unrealized gains.
According to Palfrey, the growth was largely driven by technology companies, primarily semiconductor manufacturers. At the same time, the median company in the S&P 500 increased earnings by 15.5% in the second quarter. The strategist linked the resilience of corporate earnings to the buildout of artificial intelligence infrastructure and growing energy demand.
Analysts' forecasts are rising
Palfrey pointed to an atypical trend in analysts' earnings forecasts. Usually, their estimates start at a high level and decline during the year or quarter ahead of earnings reports. Instead, forecasts are now rising, which the strategist called an anomalous sign of a strong corporate environment.
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Seaport Research Partners compares three-month changes in earnings-per-share forecasts with three-month movements in share prices to identify justified and unjustified stock moves. In Palfrey's view, shares of industrial and transportation companies are not receiving sufficient market reward for the acceleration of their fundamentals. At the same time, the technology sector attracts a significant share of investors' attention.
Impact of interest rates
The strategist also warned that high interest rates raise the cost of capital and pressure price-to-earnings multiples. According to him, stock valuations are also affected by investors' doubts over whether the current strength of corporate earnings will persist.
The next U.S. Federal Reserve decision on rates could surprise the market, Palfrey believes. According to expectations cited in the article, about 60% of market participants expected a rate increase. Discussion of inflation and the need for a rate hike could restrain U.S. stocks in the short term, in the strategist's view.
