Earnings Are Winning. But the Headwinds Are Growing
Earnings and growth are strong, but macro headwinds are growing louder. The market is entering a critical stretch. Corporate earnings and growth continue to support equities, but rising interest rates, elevated oil prices, and geopolitical uncertainty are testing investors’ willingness to pay premium valuations. The cost of money is rising. The question is whether companies can deliver enough earnings growth to offset higher rates and inflation.
Top factors driving markets this week
1. Treasury yields remain the market’s biggest headwind.
The 10-year Treasury yield has hit 5.3%, renewing pressure on equity valuations, housing, and borrowing costs. The bond market remains in control of stock market sentiment.
2. Oil prices keep inflation a problem.
Brent crude moved above $100 per barrel as uncertainty about energy supplies grows. Higher oil prices keep inflation elevated, hurt consumer spending, and complicate the Federal Reserve’s decisions. Energy prices are a major factor in inflation expectations.
3. Earnings expectations continue to power the market.
Despite the economic noise, earnings remain the market’s strongest driver. S&P 500 earnings growth expectations are ~ 30% YoY. High expectations leave little room for poor results.
4. Market breadth is becoming narrower in the indexes.
The headline indexes have kept hitting new highs, but participation has narrowed. Mega-cap technology and AI-related companies are doing the work, while small caps and more rate-sensitive stocks have struggled. Goldman Sachs and FactSet estimates found Nvidia and Micron are expected to account for more than a third of S&P 500 EPS growth, more than the bottom 490 companies combined. Investors are becoming more selective rather than overly optimistic.
5. Economic resilience is keeping the Fed cautious.
The latest services and manufacturing data point to continued economic growth, as inflation remains a problem. Stronger activity supports earnings but keeps another Fed rate hike on the table. In this week’s ISM services report, the Prices Index rose to 74%, its highest level since July 2022. Strong economic news is a double-edged sword for stocks. It supports growth but drives yields higher, putting pressure on valuations
Top factors to watch next week
1. Inflation Reality Check:
Next week’s CPI and PPI reports will determine whether inflation pressures are becoming more persistent, with oil prices elevated and Treasury yields near multi-year highs. Friday’s industrial production report will offer another read on economic growth. These reports will shape expectations for the interest rate direction.
2. Earnings season begins, and expectations meet reality:
Major banks, including JPMorgan, Citigroup, Goldman Sachs, Bank of America, and Morgan Stanley, are scheduled to report. With earnings expectations elevated, forward guidance matters more than reported results.
3. Hormuz, the hurricane, and energy prices:
Hormuz still isn’t back to normal. One more tanker attack, or a direct hit from Hurricane Isaias in the Gulf of Mexico, and oil will likely stay north of $100. That feeds directly into headline inflation and makes the Fed’s job harder at its next meeting.
Path Forward: Stay Invested, Remain Selective
The market remains constructively cautious. Earnings growth continues to support the bull market, but rising yields, elevated oil prices, and increasingly narrow market leadership suggest that selectivity is becoming more important.
Next week should offer a more concise picture of whether inflation is becoming stickier and whether corporate earnings can keep overcoming macro headwinds. Earnings fundamentals continue to support current valuations; however, the margin for error is shrinking. To support the upward direction, the market needs strong earnings, stable yields, and some relief in energy prices.
