The most bullish story in the stock market right now: Morning Brief

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Friday, April 8, 2022

Before tensions between Ukraine and Russia escalated in February, a bullish story was unfolding in the stock market: Wall Street analysts were revising their corporate earnings forecasts for 2022 and 2023 upwards.

Since then, geopolitical risks have skyrocketed, becoming the main concern among investors. The stock market was shaken, sending the S&P 500 (^GSPC) to a low of 4,114 on February 24.

Meanwhile, inflation data continued to confirm that prices were rising at a worrying rate, prompting Federal Reserve Chairman Jerome Powell and his colleagues to signal that they were willing to be more aggressive in tightening policy. monetary.

Despite these headwinds, something surprising happened: analysts continued to revise their earnings forecasts higher.

According to FactSet, analysts expect the S&P 500 to earn $227.80 per share in 2022. This estimate is 2% higher than the $223.43 expected as of December 31, 2021.

Of course, the upward revision is modest. But follow all the new concerns that have arisen since the beginning of the year.

Some, but not all, of this resilience can be explained by the profits of energy producers, which have been boosted by rising energy costs.

“A significant part of the improvement comes from the energy sector (+2.0pp), while companies affected by higher energy costs (-0.5pp) and those exposed to Europe (- 0.2 pp) have been a minor drag,” Binky Chadha, chief US equity strategist at Deutsche Bank, wrote on Tuesday. “Excluding the impact of these effects, estimates for the full year are still up +0.8%.”

So what is going on here?

It’s simple: the economy continues to be in excellent shape, supported by massive tailwinds.

Among other things, companies and consumers have very healthy finances. Companies continue to aggressively invest in their operations. Consumers, despite having complaints about inflation, continue to spend on goods and services. Consumer finances have been bolstered by a $2.5 trillion savings glut, allowing companies facing higher costs to preserve profit margins by raising prices.

Of course, we are talking about earnings expectations. And these expectations are sure to be updated as companies announce their quarterly results in the coming weeks. The lingering question: Will these expectations continue to be revised upwards or will they finally start to be revised downwards?

By Sam Ro, the author of TKer.co. Follow him on Twitter at @SamRo.

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