The Market Is Recovering Nicely From April’s Pain. Why It Could Keep Gaining.

Investors have had plenty to worry about recently, from stubbornly persistent inflation to escalating tension in the Middle East and around the war in Ukraine.

Nonetheless, stocks “at their core, are a reflection of future earnings growth,” notes

BofA

Securities Strategist Ritesh Samadhiya, meaning that despite near-term distractions over the medium and longer term “the primacy of growth becomes apparent.”

That’s good news for the market in general, particularly as the resilience of the global economy starts to be felt by a wider number of companies.

The Magnificent Seven, which fueled so much of 2023’s rally, have done nearly all the hard work in terms of earnings this quarter too, notching a 48% year-over-year earnings per share growth in the first quarter, compared with an estimated 2% decline for the remaining 493 companies in the S&P 500. Yet Samadhiya notes that the S&P 493 are expected to close the gap by the end of the calendar year: Consensus calls for the fourth-quarter earnings per share of the Magnificent Seven (

Apple
,

Microsoft
,

Meta
,

Amazon
,

Nvidia
,

Alphabet

and

Tesla

) to climb 15%, compared with a 14% rise for the rest of the index.

That breadth of profitability should give bulls courage, as should improved investor sentiment: Some 20% of BofA’s global fund manager survey respondents see an improvement in global profits over the next year, marking the highest level since August 2021.

Of course, the biggest obstacle to more bullishness is inflation, “the biggest left-tail risk standing today,” Samadhiya writes. While inflation might be categorized as a distraction, at some point it does become a threat to profits, as cost of capital rises and higher-for-longer interest rates can threaten the health of the economy.

The last leg of inflation has been more difficult to vanquish than BofA predicted, Samadhiya admits, and he can’t rule out 3% readings through the end of the year.

Even with that potential drag, his team believes that disinflation is still in full force in the rest of the world. And while “the back-to-back upside surprises in the U.S. may make one feel that they can’t catch a break on inflation, there is one positive development brewing in the background: the labor market is probably in a stealth rebalance mode,” he writes. “Labor market conditions are, undoubtedly, still tight, but the March uptick aside, momentum remains soft on balance.”

Indeed, Barron’s characterized the latest jobs report from last week as nearly perfect, showing the economy is slowing at just the right speed.

With the hope that, for all its stickiness, upside for inflation may be limited, Samadhiya is sticking with his “constructive view on markets given the positive impulse of stronger earnings growth and sustained disinflation in majority of the economies.”

Although we’re just a few days into May, so far the market does appear willing to turn over a new leaf after April’s losses. The S&P 500 gained nearly 0.6% last week and rose another 1% on Monday. Here’s hoping the thaw can continue.

Write to Teresa Rivas at [email protected]