04/28/2025 Market Strategy
Break on Through
A Rally Set Off By Q1 Results Suggest Where the Markets Want to Go
Key Takeaways
- With 178 or 36% of the firms in the S&P 500 index having reported, first quarter results are tracking higher than forecast. Profits in Q1 are up 17.8% from a year earlier on 4.1% revenue growth. Prior to the start of the quarter, Bloomberg’s bottom-up estimates put analysts’ expected earnings growth at 6.8%.
- At this still early stage in the season, seven sectors are reporting positive earnings growth while four are reporting profit declines.
- Investors will again be focused on Q1 earnings as 193 firms are due to report this week; another 92 are scheduled the week after.
- This week’s economic data includes the first estimate of GDP in Q1. The consensus median estimate is for scant growth (0.4% annualized). In addition, inflation data (the PCE deflator) for March as well as the ISM manufacturers survey for April are due..
Global stocks reversed positions last week in a rally that saw US equities outperform foreign bourses. Last week also saw the Dow Jones Industrials, the S&P 500 and the NASDAQ Composite post respective gains for the week of 2.5%, 4.6% and 6.7% after the Trump administration took another pause in its tariff regime deployment.
US equities that had been pretty much locked in worry-worry mode for much of the time since February 19 when the S&P 500 hit its most recent record high found reason to change direction not just on a lessening of the day-to-day tariff war worry, but also on better-than-expected earnings growth. Stocks last week regained lost ground as Q1 earnings season pressed on with better-than-expected results.
Earnings Exceeding Expectations
With a little better than a third of the firms in the S&P 500 index having reported, profits in Q1 are up 17.8% from a year earlier on 4.1% revenue growth. Prior to the start of the quarter, Bloomberg’s bottom-up estimates put analysts’ expected earnings growth at 6.8% from a year earlier.
While it’s still too early in earnings season to draw any conclusion thus far, seven sectors are reporting positive earnings growth while four are reporting profit declines. Of the seven sectors showing positive earnings growth in Q1 three are showing double digit earnings growth: healthcare (76%), communications services (28%) and information technology (15%).
Of the four sectors showing profit declines three are showing double digit declines: Energy (-37%), Consumer Discretionary (-21%) and Materials (-13%).
A Big Week for Economic Data
Beyond tariff talk and earnings results this week investors will be focusing on a hefty tranche of key US economic data covering inflation, trade data, inventories, home prices, job openings, services, manufacturing, and Q1 GDP leading up to Friday when the monthly job gains and unemployment rates for April are released.
With all of the above likely to carry weight in terms of the direction of the markets this week we remain positive on prospects for stock prices this year once greater clarity can be provided related to monetary policy, the extent of tariff policy and the effects on the economy. C
urrent soured consumer sentiment, projections of recession and chaos notwithstanding clues that cooler heads may actually prevail look to us to be increasing of late with opportunity for fundamentals to prove more resilient than bears, skeptics and nervous investors can imagine.
The timeline of market history in our view suggests the present period has plenty of risk strewn around the economic landscape as well as plenty of opportunity.
We continue to suggest that investors practice patience with an emphasis on diversification and quality in portfolio structures. Looking for “babies that get thrown out with the bathwater” rather than broadly “buying the dips” appears to us a better approach to take with levels of uncertainty still relatively high.
It’s a workout market for now.
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