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Party like it’s 1999

So far only around 25% of the S&P 500 companies have released Q1 results, but it is obvious that the current reporting season will be exceptionally strong. Earnings growth is the strongest that it has been in ten years.

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Key takeaways:

  • The reporting season has been exceptionally strong so far, but the peak of growth momentum is likely to fade soon.

  • Against this backdrop, an imminent temporary interruption of the stock market’s upward trend is becoming increasingly likely.

Furthermore, although consensus estimates for the first quarter have been raised more sharply than ever before in recent months, the results so far are well above expectations. Earnings growth in the first quarter compared with the same period last year will probably be well ahead of 30%, and consensus expectations for Q2 earnings growth are sitting above 50%. Sentiment on the markets is accordingly optimistic.

The S&P 500 is rising to fresh all-time highs every week
Against this background, the question arises as to how long the party can continue. A look at the history books shows that only a recession can turn a bull market into a bear market. Such a recession in the US is unlikely in 2022, as well as in 2023, and therefore an imminent end of the current bull market is also unlikely. That is the good news. 

Consolidation ahead
The bad news, on the other hand, comes from the almost unprecedented earnings growth and the corresponding economic momentum and earnings upside revisions. Here, momentum is likely to slow at the beginning of the third quarter. Moreover, historically, equities have a more difficult time when purchasing managers’ indices peak and growth momentum starts to slow. In addition, there is usually a rotation from cyclical to defensive sectors once growth peaks. Historical averages do not necessarily suggest a strong correction, but if history repeats itself, a consolidation in Q3 appears likely.

Conclusion for investors
However, this will probably only be a breather on the way to new highs towards the end of the year – or in 2022 at the latest. That said, in view of sporting valuations on the stock market and a – at least partially – euphoric market mood, the consolidation could be stronger than historical data suggests.

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