The S&P 500 is trading at record highs shrugging off risks related to the Iran war as companies deliver solid earnings—but brace for a downturn once earnings season ends, strategists warn.
The first quarter earnings season has been stronger-than-expected, fueling record-setting gains for major indexes. The record highs come despite ongoing risks to gains ranging from the war in Iran, high oil prices, surging bond yields, and potential rate hikes. Strategists on Wall Street warn that stocks could see a fall from recent highs as the earnings season draws to a close.
“We’re a little bit concerned that the market’s going to test once earnings season is over in totality,” Nancy Tengler, Laffer Tengler Investments CIO, said. “Then we have a lack of news flow, so the market will turn its attention to the Fed, to the Middle East.”
The strategist said that investors should be prepared for a stock market correction in the post-earnings lull.
Strongest earnings season since 2021 driven by AI
More than 90% of S&P 500 companies have reported quarterly results, with earnings broadly exceeding Wall Street’s estimates.
“The S&P 500 is on pace for its best reporting season since the post-COVID era, with EPS growth tracking +25.1% YoY, versus +13% expected heading into the quarter,” Citadel Securities’ head of equity strategy, Scott Rubner, said, adding that 84% of companies have beaten estimates for earnings per share, EPS estimates, the highest beat rate since the fourth quarter of 2021.
First quarter earnings crushed consensus estimates
The strategist said that it’s important to note that earnings projections weren’t low. “Expectations entered earnings season elevated (highest since 2021) and continued moving higher as companies reported.”
Siebert Financial CIO Mark Malek, said this earnings season has been nothing short of “stunning,” calling out AI as the driving force behind the earnings strength.
“The stock market is pricing an AI-powered earnings machine that is, right now, delivering,” he wrote.
Prepare for a post-earnings unwind
After recent gains, strategists said that they’re worried about a post-earnings hangover.
“The near-term setup now warrants more tactical caution,” Citadel Securities’ Rubner said. “After a ~17% rally off the lows, we think the risk/reward has become less asymmetric and that a short-term flow-of-funds unwind becomes increasingly possible if momentum begins to fade.”
Tengler echoed a similar sentiment. “I think you want to be prepared for some sort of correction.”
A downturn could be a buying opportunity
Despite raising concerns about a near-term slump, the strategists underlined that fundamental strength supporting equity gains signal a bullish outcome in the longer term.
Tengler flagged potential pullbacks as moments to buy the dip. “It’s going to be another opportunity, because the earnings growth that’s driving this market is sustainable.
“The fundamental backdrop remains solid. Q1 earnings were the strongest since the post-COVID era, AI spending continues to accelerate, and corporate demand remains supportive through both buybacks and passive inflows,” Citadel Securities laid out.
Malek, CIO of Siebert Financial, “Wall Street’s bullishness has become loud, with major firms raising S&P 500 targets toward the 8,000 range. That may look like cheerleading, but the earnings backdrop gives them a real case.”
A third-quarter correction followed by a fourth quarter rally is consistent with the patterns that other top Wall Street analysts’ outlooks.
