S&P 500 and Dow Jones Surge with Strong Earnings Reports Ahead
This week has shown promising momentum in the markets. Both the S&P 500 and Dow Jones Industrial Average have increased for seven consecutive days, with expectations for an eighth gain. This marks a positive shift from recent volatility.
A significant breadth thrust has resulted in renewed buying pressure for stocks. Notably, there was a three-day stretch during this rally where 70% or more of stocks advanced each day. This occurrence is rare, having happened only 28 times since 1950. Historically, following such signals, stocks have risen in 27 out of 28 cases, averaging a return of nearly 19% after one year. Additionally, a rare Zweig Breadth Thrust, identified by Marty Zweig, also signaled last week, suggesting that the recent lows may have been reached. Breadth thrusts indicate a broad participation of stocks in this upward trend.
First-Quarter Earnings Ease Investor Concerns
We are now midway through the first-quarter earnings season, with 256 S&P 500 companies reporting results. The total earnings for these firms are up 14% compared to the same period last year, supported by a 4% increase in revenues. This week, major technology companies, including Apple (AAPL) and Amazon (AMZN), will be in the spotlight.
Yesterday, after market close, Meta Platforms (META) and Microsoft (MSFT) both exceeded expectations for earnings and revenue. Despite concerns about a slowdown in advertising amid tariff uncertainties, Meta reported earnings of $6.43 per share, with revenues of $42.3 billion, beating the consensus estimates by 23.2% and 2.6%, respectively.
Moreover, Meta provided optimistic revenue guidance but raised its full-year capital expenditure estimates. In early trading on Thursday, META shares increased by more than 5%:
Image Source: StockCharts
Similarly, Microsoft exceeded its fiscal Q3 projections due to robust cloud services bookings. The earnings of $3.46 per share surpassed the Zacks Consensus Estimate of $3.20, marking an 8.1% surprise. Cloud revenue reached $42.4 billion, up over 20% year-over-year, also outpacing the expected $42.2 billion. On Thursday, MSFT shares surged 9% at the market open:
Image Source: StockCharts
Economic Indicators Prompt Fed Considerations
Strong earnings have alleviated some investor fears about the economy, especially after mixed signals were reported on Wednesday. The first-quarter GDP data revealed that the U.S. economy contracted at an annual rate of 0.3%, according to the Commerce Department. This figure was lower than the expected 0.1% growth, marking the first quarter of negative growth since Q1 2022, contrasting sharply with the 2.9% growth seen over the previous two years. Imports surged by 41.3% driven by a 50.9% increase in goods as businesses braced for anticipated tariffs from the Trump administration.
The Fed’s preferred inflation measure—the core PCE index—remained unchanged from the previous month, falling short of the projected 0.1% increase and the 0.5% rise noted in February. Over the year through March, core inflation rose by 2.6%, which was in line with expectations.
In light of President Trump’s tariff initiatives raising concerns about slow growth and inflation, market participants are currently pricing in four rate cuts this year. Following the latest inflation data, the likelihood of a June rate cut has increased to approximately 67%.
Final Thoughts
The current breadth thrust indicates a potential short-term recovery. Data suggests the possibility of a return to a longer-term bullish trend. However, the recent gains have placed the major U.S. indexes near potential resistance points. Following a volatile correction, it is crucial to balance risk and reward while managing potential downsides.
Market bulls are hopeful for continued positive reactions to upcoming earnings reports. Investors should remain vigilant as the first-quarter earnings season progresses.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
