October has been a strong month for stocks so far with the S&P 500 up by more than 5%. This means that YTD, the S&P 500 is up more than 20%. This performance is certainly impressive especially as the market is facing a litany of headwinds that in a different environment could have led to large corrections.

Bearish Circumstances

For one, the market is up more than 100% since March bottom last year. Naturally, this has led to an overbought market with high levels of margin debt, retail inflows, and allocations that normally signal some sort of pullback or pause for the market.

Further, we have the economic growth outlook significantly slowing over the last few months. It's evident in a variety of measures such as the Atlanta Fed GDPNowcast now forecasting a 0.5% increase in GDP for Q3 due to negative impacts from the delta variant and supply chain issues. Many analysts also expect that consumer spending may drop next year especially due to the stimulus payments.

Finally, we've learned over the last decade that slowing growth is not necessarily an impediment to the stock market advancing as this would be offset by a more dovish Fed. This is not the case currently as rising inflationary pressures mean that the Fed has no room to ease which means that we have a decelerating economy and a more hawkish Fed. In many circumstances such as 2019, we saw that this was enough to spark a selloff in the stock market.

Earnings to the Rescue

The simple explanation is that earnings season has been so strong that it's more than overwhelmed these bearish factors. So far, about 30% of companies in the S&P 500 have reported with over 80% beating earnings estimates and 75% topping revenue estimates. Of course, this has led to a fury of analysts raising their forward estimates and causing the S&P 500's forward P/E to drop from above 22 to between 20 and 21.

Another way to look at is that for Q3, the S&P 500 was expected to grow earnings by 24% a month ago. At the start of October, it increased to 27%. Last week, this was again hiked to 30%. And as we enter this week, analysts are now forecasting 34% EPS growth for Q3. Equally important, margins remain elevated on a historical basis at 12.9%, showing that companies are able to pass on rising costs.