Stocks mostly rose Monday, powering the S&P 500 index and Nasdaq Composite to closing records. Yet limitations to the market rally are emerging, even as companies continue reporting better-than-expected earnings.
The Dow Jones Industrial Average fell 61.92 points, or 0.18%, to close at 33,981.57. The S&P 500 rose 7.45 points, or 0.18%, to end at 4,187.62, and the Nasdaq Composite gained 121.97 points, or 0.87%, to close at 14,138.78; both indexes ended at records. The biggest gainer in the S&P 500 was Otis Worldwide (ticker: OTIS), which saw shares rise 7% after the maker of elevators and escalators beat earnings estimates.
Corporate earnings for the first quarter are indeed mostly topping analyst’s expectations, which is one positive for stocks. With just over a quarter of the S&P 500’s market capitalization having reported, companies are beating earnings-per-share estimates by 23% in aggregate, according to data from Credit Suisse strategists. And the beats aren’t concentrated in a few sectors, with more than 80% of index’s component companies beating by any margin.
Not only do higher-than-forecast results signify that earnings are trending at higher levels across the board, but investors are rewarding the companies that outperform; the average company that has upside revenue and earnings this reporting season sees shares outperform the broader market by 1.5 percentage points, versus 1.4 percentage points historically, according to Credit Suisse.
But not all boats are being lifted evenly by the earnings high tide, and only just over half of S&P 500 stocks rose Monday.
That’s partly because the recent broader market rally leaves many stocks trading at expensive levels, already reflecting a high degree of optimism on the future. The average S&P 500 stock trades at just over 22.3 times next year’s earnings. That’s higher than many strategist’s target multiples of around 20 times, as rising interest rates erode the value of future profits.
“Stock valuations are elevated right now, and a lot of good news is priced in,” wrote Jeff Buchbinder, Equity Strategist at LPL Financial, in a note.
None of this means the bull market can’t continue, but stock gains may need to moderate in the near term.
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