In terms of what moves stock prices, the two biggest factors, are earnings and interest rates. Of course, there can be some deviation at times, especially during periods of extreme greed and fear.
However, the longer-term destination and path of the market are largely determined by earnings and rates. And that's precisely why news or data that affects these factors or the perception of these factors can influence prices and are treated importantly by market participants.
Therefore, it's important and instructive to check in on how Q2 earnings season is developing, especially because the resilience of earnings and continued projections of earnings growth in upcoming quarters, is one reason for the market's resilience.
In Q2, companies in the S&P 500 (NYSE: SPY) had 6% earnings growth. At the start of the year, analysts were projecting 8% growth. Following Q1 earnings season, the S&P 500 earnings forecast was cut to 3%, so it was a modest beat relative to expectations.
76% of companies in the S&P 500 did beat their forecasts while 71% of companies beat on revenue. It's important to highlight that these tend to be higher-quality companies given their size. And, many will issue forecasts strategically.
Another measure that investors were watching is profit margins. Here, there was some deflation to 12.4% from 12.7% in the last quarter.
In some ways, 12.4% is close to historically high levels of around 13% and shows that the economy continues to have enough strength and activity to absorb this headwind. It's probably also a reflection of the greater share of tech profits which intrinsically have higher margins.
Some negative news included 72 companies warning about higher costs or cutting forecasts. Most notably, we have seen headlines of Ford (NYSE: F) and FedEx (NYSE: FDX) warning about higher costs and guiding lower Q3 forecasts. In FedEx's case, this is likely a leading indicator of deeper stress and in Ford's case, it could have spillover effects in terms of its supply chain.
For Q3, analysts are currently projecting 3.5% earnings growth which is a significant downgrade from the projected earnings growth of 9.5% at the end of June. However, it's still positive and projections are positive for 2023 as well which seems inconsistent with a hawkish Fed and growing recession narrative.