VTI - Rates Of Change Continue To Improve

2023-09-06 13:45:55 ET

Summary

• Stock prices fell yesterday due to rising oil prices, inflation concerns, and heavy corporate bond supply.
• FactSet's latest earnings report shows positive trends, with a decrease in recession mentions and increased earnings estimates.
• Analysts are raising estimates for the fourth quarter and 2024 as well, indicating a bullish market outlook.

Stock prices ran into multiple headwinds yesterday, which drove all the major market averages lower. Brent Crude oil prices (CL1.COM) breached a 12-month high of $90/barrel, due to an extension of supply reductions by Saudi Arabia and Russia, which stirred inflation concerns. The dollar was stronger on a more upbeat outlook for the U.S. economy from Goldman Sachs. Interest rates edged higher across the yield curve on an extremely heavy day of new corporate supply. I did not read too much into yesterday's events.

Instead, I am focusing on the positive rates of change we are seeing in the incoming data, as it relates to the economy and corporate earnings. I have been talking about rates of change frequently over the past 15 months ever since the rate of inflation peaked at 9.1% last June, as this is what I see dictating the underlying trend in financial markets. Yesterday, FactSet released its latest assessment of the earnings season for the second quarter, and I can't see it being interpreted as anything other than very good news. The bearish prognosticators keep pushing out their calls for a recession in the U.S., but corporate CEOs see things differently. The number of times the word "recession" has been used during conference calls for S&P 500 (SP500) companies has fallen for the fourth consecutive quarter. This is a hugely positive rate of change for those who are on the front lines of the economic expansion.

The long-term trend in the stock market moves in concert with corporate earnings, which should come as no surprise. Earnings grow and contract with the ebb and flow of economic activity. This is why the positive rate of change we are seeing in earnings estimates for the S&P 500 is very good news for market performance over the coming 6-12 months. For the first time in two years, analysts are raising estimates during the first two months of the current quarter. This marks an inflection point that can't be interpreted as anything other than bullish.

In fact, the consensus earnings estimate for the fourth quarter is also on the rise, with an increase of 0.6% over the past two months. This has resulted in an increase in the estimate for all of 2023 by 0.9% to $220.45. This optimism is leading to a new inflection point in 2024 earnings expectations, which are also now on the rise to more than $248. This is not what we typically see in advance of a recession or bear market. It is easy to get lost in the minutia of day-to-day trading activity. I prefer to stay focused on what dictates underlying trends in the economy and markets. Rates of change suggest both are still moving in a positive direction.

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