Investors are looking for reasons that might push the market higher

As companies prepare to open their books to investors over the coming weeks, in the quarterly weather known as earnings season, market watchers balance relatively weak estimates of past earnings with brighter projections of future performance.

Stock prices tend to follow expectations of upcoming earnings rather than responding to details of the past, and markets have risen in tandem with improved investor expectations for the economy. The S&P 500 has gained more than 20 percent since October.

Companies included in the index are expected to post a 7 percent decline in earnings for the three months through June, compared to the same period last year, according to FactSet. But much of that decline is concentrated in a few sectors, such as energy, which posted huge profits last year, making comparisons difficult with this year. And corporate executives have a habit of lowering investors’ expectations before announcing earnings, so that they can beat expectations.

“The bottom of the earnings cycle may have already been reached,” said Pinky Chadha, chief US equity analyst at Deutsche Bank, who, contrary to consensus, correctly predicted that stocks would rise this year.

The darker forecasts at the beginning of the year were not justified. Despite widespread fears of a recession, the economy has remained resilient. The latest inflation report, released this week, fueled optimism that the Federal Reserve may act to tame higher prices without dragging the broader economy — and US businesses — into a deeper recession.

With strong consumer spending supporting economic resilience, the focus will be firmly on how households perform, as savings built up during the pandemic dwindle. Even here, several large companies have already managed to raise prices significantly, mitigating the impact of any consumer weakness that may yet come.

This year, PepsiCo said it had already raised its prices enough to mitigate rising costs for the rest of 2023. On Thursday, the company reported that it had raised prices by another 15 percent for the three months through June, reflecting consumers’ continued resilience. Absorption of high prices and companies’ willingness to exploit them.

“It’s encouraging that the consumer still seems so resilient,” said Bonnie Herzog, an analyst at Goldman Sachs.

Ramon Laguarta, CEO of PepsiCo, told analysts Thursday morning that a strong job market in the United States and abroad has helped consumers. Data from the Labor Department last week showed that even as the economy slowed, unemployment remained low.

Even some of the companies hardest hit by the pandemic, such as cruise operators Royal Caribbean and Carnival Cruise Line, have begun to recover.

While analysts expected PepsiCo to report strong financial results, the company still exceeded expectations, as it raised its share price by 2.4 percent on Thursday. Over the past 10 years, on average more than 70 percent of companies have exceeded analyst expectations, according to FactSet.

Even if some companies start to slide, investors have already shrugged off a 2.1 percent drop in earnings for the first quarter, with the decline proving better than the more than 6 percent drop that was expected.

This better result helped push the S&P 500 higher. The average analyst at the start of the year predicted the S&P would rise about 5 percent over the course of 2023, according to Bloomberg’s compilation of forecasts. It took less than a month to break through this level.

Since then, forecasters like Bank of America, Goldman Sachs and BMO have raised their forecasts.

John Flood, head of US equity sales at Goldman Sachs, wrote in a note to clients Wednesday that for the first time this year he was answering questions about whether the S&P 500 could reach a record high in 2023, which is still about 5 percent away. . “I’m going yes,” he wrote.

However, few analysts expect the index to rise further from here, with plenty of upside about a resumption of earnings growth that has already settled higher.

Some, including analysts at Cantor, Morgan Stanley, BNP Paribas and Barclays, continue to predict a decline of about 10 percent or more before the end of the year.

The sharp rise in the S&P 500 since its October low means that companies are already broadly valued at historically high levels. While unemployment remains low, there are signs of a downturn in the labor market. Pepsi reported strong profits and raised prices, but its sales volume took a hit as a result, as some consumers refrained from raising prices.

The expiration of the student loan moratorium, which means loans will be repaid in the fall, was also cited by some analysts as another headwind for consumers.

Companies could face greater resistance to rising prices, while costs – such as higher wages – linger, said Venu Krishna, apart from the bevy of tech companies that have pushed the market higher, in part because of enthusiasm about the profit potential of AI. .

“We continue to see continued pressure on earnings,” he said.

Even some of the most bullish strategists concede that while the worst of corporate earnings may soon be in the rearview mirror, it will be difficult for stock prices to keep going higher because so much of the recent optimism is already in the market.

However, expectations heading into the latest round of financial results are still far from the bad expectations at the beginning of the year, as Mr. Shatha expects stock prices to keep “rising”.

“There is a long list of concerns that investors have, and whether or not we are entering a recession is an open question,” he said. “But with a prolonged period of potential recession, and it is expected to be moderate, we believe the market sell-off will be modest and short-lived.”