Can Robust Earnings Propel the Market's Uptrend Even Further?
That's the trillion-dollar question as companies don't need to post disappointing results for some holders to take profits.
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More than 100 S&P 500 stocks will report earnings this week, with Alphabet GOOGL and Tesla TSLA taking center stage Wednesday. So far, earnings season has been generally positive, helping to propel the S&P 500 and Nasdaq to record highs. However, with many stocks becoming even more technically extended, the trillion-dollar question is whether earnings and guidance will be strong enough to sustain the uptrend.
With the significant recent gains in many individual stocks and the indexes, it is a perfect setup for a sell-the-news reaction. Companies don't need to post disappointing results for some holders to take profits. The strategy of many aggressive funds will be to sell into strength and to buy weakness.
The bears have been flummoxed by the market's refusal to react to their lengthy list of arguments about why a major reversal is imminent. Instead, the tariff issue has generated a shrug, and worries about inflation and slowing employment are being ignored.
While the bears have persisted in their insistence that disaster awaits, they have been out of position for so long that capitulation is taking place, which is helping to push the indexes to new highs as shorts cover and the wall of worry is scaled.
An additional issue that bears have recently been jabbering about is increased speculative interest in junk stocks. Aggressive traders have been running up some low-priced small caps, most of which have very questionable fundamentals. This is textbook late-stage action, but it is not as widespread as we saw most recently when the SPAC frenzy took hold late in 2024. This sort of speculation never ends well, but it can persist for quite a while.
The main issue that investors should focus on is the reaction to upcoming earnings reports. If a company beats and raises estimates, will its stock see another burst in momentum, or will it invite profit-taking into strength? If there is a miss or weak guidance, how badly will a stock be punished?
The reaction to Netflix NFLX is a good example of what the bulls do not want to see. The report was OK, but the stock fell 5% before it recovered quite a bit on the next day. It will take some major improvement for the stock to rebuild its uptrend.
It is a very tricky market right now with little opportunity for buying at attractive entry points. Earnings reports are likely to shake things up.
At the time of publication, Rev Shark had no positions in any securities mentioned.
