Earnings vs. Headwinds: Mixed Signals For S&P's 2023 Performance

Where is the S&P headed in the second half of 2023? So far, the large-cap index is down 1% in July, after declining the week ended July 6 in light holiday-week trade. 

As always, there are conflicting narratives when it comes to the market’s likely direction. With inflation data due out on July 12 in the form of the Consumer Price Index, some market bulls believe tamer-than-anticipated inflation data would give the Federal Reserve less reason to raise rates. That sentiment could send stocks skyrocketing. 

Meanwhile, other investors believe profit warnings could result in a market dip.  

So far, the prognosticators have been confounded. Going into 2023, most market fortune-tellers were anchored to the near inevitability of a global recession, with bonds emerging as a safe haven as equities tanked. That scenario would be eased as the hot employment and housing markets receded, causing the Fed to hit the brakes on interest rates. That’s what forecasters believed would result in a renewed market rally, beginning in the current quarter.

As we all know, that’s not what happened. 

Analysts Split On 2H Forecasts

Now, with stocks taking an early July breather after the S&P 500 rallied 6.47% in June, analysts are once again split on whether weak profit expectations will put a damper on the tech rally that took place in the first half of the year or whether better-than-expected earnings will mean a continued rally in the S&P 500.

One thing is statistically likely: Because the S&P ended 2022 with a decline, there’s a good chance, based on historical performance, that 2023 will be a winning year. 

Nonetheless, there’s plenty of disagreement on what could unfold between now and December 31. 

With a year-to-date rally of 15.63%, it wouldn’t be a surprise to see a pullback, even a minor one, at this point. This is where it’s beneficial to look at market history. 

Pullbacks During A Longer-Term Rally Are Normal

In 2021, the S&P finished the year with an advance of 26.44%. Along the way, the index pulled back several times along the way. In September and October, it finished below its 10-week moving average for several weeks in a row. You can see those pullbacks using the SPDR S&P 500 ETF Trust NYSEARCA: SPY chart. 

It’s worth keeping that in mind because when, not if, the S&P pulls back, that doesn’t mean it’s time to hit the panic button. Pullbacks in the midst of rallies are hardly unusual. 

In a July 6 research note on mutual fund performance, Bank of America equity and quant strategist Savita Subramanian wrote that company-specific factors are playing a bigger role in performance differentiation between stocks. In addition, she pointed out that breadth, which was decidedly narrow in the first half of the year, is beginning to equalize. She wrote that 50% of stocks outperformed the S&P 500 last month, up from just 23% in May.

It’s not just analysts who disagree with the potential market or economic direction: In earnings reports, companies are still referring to economic headwinds, even when they beat sales and earnings views and boost their guidance. It’s understandable, given the remaining question marks about interest rates and a possible recession, that companies would seek to manage investor expectations somehow, even when they’re on track for a strong second half. 

In a July 10 blog post, analyst John Butters at FactSet compiled data showing the highest number of companies in the S&P since the third quarter of 2023 are now reporting positive earnings guidance.  

Room For Bulls & Bears Alike

Sounds pretty sunny, right? Sure, that’s one interpretation. But the bears can get their say by digging into the numbers. FactSet’s blog post reads, “As of today, 113 S&P 500 companies have issued EPS guidance for the second quarter … Of these companies, 67 have issued negative EPS guidance, and 46 have issued positive EPS guidance.”

There’s definitely room there for either a bull or bear case. 

Ultimately, the forecasts and prognostications, while fun to read, are absolutely nothing to hang your hat on. As we’ve all learned in the past three-and-a-half years (and well before then, really) is that events and conditions are constantly changing. 

Keep reminding yourself: Earnings and revenue growth drive price performance. The charts, not opinions, either yours or someone else’s, will show you what’s really happening in the market.

But most of all: A down year in the market is seldom followed by another down year. Sure, it happens on occasion, but the historical odds are in favor of the S&P finishing 2023 in the black.