The recent third-quarter results spared the stock market from what could have been an “earnings apocalypse,” paving the way for potential gains as we approach the end of the year. This optimistic outlook comes from Brian Belski, BMO’s chief investment strategist, who, in a recent statement, acknowledged the prevailing negativity among investors despite the ongoing stock rally.
“While there has been an impressive gain so far this month, there’s still a notable amount of pessimism and concern regarding the stock market’s direction,” Belski remarked. However, he sees this skepticism among investors as a catalyst for the market, suggesting that stocks are positioned to “climb the wall of worry” in the coming months.
Expressing confidence in the bullish market, Belski stated, “We continue to view this as a bull market, and the path of least resistance is towards higher stock prices through year-end.”
He pointed out that the robust start to 2023 provided a buffer for recent weaknesses, and historically, strong beginnings have often paved the way for continued gains, despite occasional setbacks.
Belski emphasized that investors might be overlooking the resilience of corporate earnings, especially given initial concerns about overly optimistic earnings estimates for the year. Despite a brief earnings recession, companies are now delivering on profits.
With 94% of S&P 500 companies having reported their third-quarter earnings, an impressive 83% surpassed profit estimates by a median of 7%, exceeding the historical average. Fundstrat data indicates that third-quarter earnings per share for the S&P 500 are on track to grow by 11%, excluding the energy sector.
Contrary to fears of an “earnings apocalypse,” Belski highlighted, “Earnings apocalypse has not occurred.” Aggregate earnings surprises have consistently exceeded average levels throughout the first three quarters, with a high percentage of companies beating estimates, and positive guidance trends persisting.
The robust earnings performance positions the stock market for sustained growth in the coming months, bolstered by seasonal tailwinds in the last two months of the year and a notable improvement in stock market breadth.
Belski pointed out that the number of outperforming S&P 500 stocks has increased, signaling increased participation in the market rally and suggesting a foundation for the continued success of the current bull market.