Why Today's Market Plunge Isn’t About Economic Fundamentals

In the past two months, there have been a lot of economic and market distractions, but market fundamentals remain strong.

More Evidence the Market Sell-Off was Sentiment Driven As I write, over 95% of S&P 500 companies have reported earnings for the second quarter, and the overall results were solid. Total earnings for the group were up 8% year-over-year on 5.1% higher revenues, and Zacks Investment Research expects those figures to adjust upward once all the results are in. Approximately 80% of companies beat their earnings-per-share estimates for the quarter.1 In previous quarters, many investors have correctly attributed positive earnings growth to mega-cap technology companies, specifically the “Magnificent 7.” These companies are still posting strong earnings growth, at 30% for the second quarter. But profit generation is notably widening, with the “other 493” stocks in the S&P 500 posting positive earnings growth in Q2 2024 for the first time in five quarters, at 7%. I could see this earnings gap narrowing in the coming quarters as well, which as an aside I think makes a strong case for broad diversification in equity portfolios right now. Don't Miss These Market Insights! To help you stay ahead in today’s unpredictable market, I invite all readers to explore Zacks’ Stock Market Outlook Report 2, which offers key insights into important market factors, such as: Capital markets commentary: Is the S&P 500 too concentrated? Key U.S. economic data Global market data Zacks S&P 500 earnings insights Zacks sector picks And more… Get the insights you need to act confidently and safeguard your investments before the market shifts further. If you have $500,000 or more to invest, request our free Stock Market Outlook Report 2 today! Overall, this level of corporate earnings growth is the best we've seen since the first quarter of 2022, and as seen on the chart below, the aggregate earnings total for the last quarter is on track to set a record. In short, U.S. companies have never generated this level of earnings at any point in history. Total S&P 500 Quarterly Earnings (Billion $) Yet few in the financial media are talking about it. Over the past two months, there have simply been too many economic and market distractions (and for many, political distractions as well). As the second quarter earnings season was in full swing, financial media was gripped by the sharp sell-off tied to the yen carry trade, which saw investor sentiment swing sharply negative. Then, expectations kept moving lower with the release of the weak jobs report in July, which added to investor unease and likely fueled volatility. The result was that instead of talking about earnings estimates for the next year and the expectation of 10+% year-over-year earnings growth in the fourth quarter, financial media and many investors were focused on the unemployment rate ticking higher to 4.3% and the possibility of a hard landing. The strong earnings season was lost in the shuffle. In my view, these are not the conditions I’d flag as a potential bear market. What I’m looking for, generally speaking, is a deterioration in earnings or other economic fundamentals as investor sentiment is too optimistic and/or swinging positive, which is the opposite of what we're seeing now. As seen in the chart below, Zacks is expecting strong relative earnings growth for the next few quarters, which is likely to correspond with more economic growth and falling interest rates—all while investor sentiment has reset lower. I think that's bullish. Quarterly Earnings and Revenue Growth Rate (YoY) Market prognosticators have also been warning—for the better part of a year—that the U.S. consumer was running out of steam, which in my view has contributed to souring investor attitudes about the market. But July retail sales data, released in August, told a different story. Retail sales rose at a seasonally adjusted 1% in July compared to June, when retail sales had declined -0.2%. Source: Federal Reserve Bank of St. Louis 3 Spending rose across almost all goods-related categories, with strong vehicle sales being accompanied by rising purchases at grocery stores, electronics stores, and online. Pervasive fears that a slowing jobs market and rising delinquencies were pinching consumers have not been realized to date, which underscores the gap between negative sentiment and positive fundamentals. That is a setup that investors would like to see, in my view. Bottom Line for Investors Looking at earnings expectations on an annual basis, full-year S&P 500 earnings for 2024 are expected to be up +8% on +1.8% revenue growth. And if we exclude the Energy sector drag, whose earnings are expected to be down -11.8% for the year, total earnings for the rest of the index would be up +9.6%. Simply put, these figures are not currently reflected in investor attitudes about the market, which tells me that the wall of worry remains firmly intact—a bullish sign for the balance of the year. To help you capitalize on these opportunities and stay ahead in the current market conditions, I'm offering all readers our comprehensive Stock Market Outlook Report 4. This report includes a detailed analysis and actionable insights to ensure you remain aligned with your investment Capital markets commentary: Is the S&P 500 too concentrated? Key U.S. economic data Global market data Zacks S&P 500 earnings insights Zacks sector picks And more… If you have $500,000 or more to invest, request our free Stock Market Outlook Report today! About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. Talk to a Zacks Wealth Advisor today. © Zacks Investment Management  |  Privacy Policy 1 Zacks.com. 2024. 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3 Fred Economic Data. 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