Trending Remains Bullish and Earnings Remain Solid.
As I start to write this note, there is a lot of expectation that the US-China tariff related talks have led to something good. Although I have not seen any specifics yet. The challenge with these situations is whether the actual development is as good as what the markets expect. Nonetheless, I would think the fact that there have not been any negative comments from either side at the end of this round of talks is a positive.
At this point in time, whether we go higher or not will depend on whether the earnings growth forecasts remain the same or are they being lowered. I should actually say that at all points in time earnings are the only reason for stock markets to go up or down. We sometimes forget that.
In other words, whether we reach an understanding with China on trade does not really decide what the stock market does. The market may get a short-term boost if the news and agreement seem positive. But then, the impact of the deal on earnings expectations is what will drive the markets up or down.
And we should not forget that we did not have any tariffs before April 2nd (so called Liberation Day). So, even if we end up with 10% universal tariff and nothing else, it will still be higher than before. So, the bright minds will have to do some number crunching to what that does to earnings expectations. And companies will need to figure out how to handle the tariff without it being much of a draw on their earnings.
Just wanted to place that in proper perspective before we get too bulled up. Note that the trending remains bullish and I am not suggesting at all that we have to start getting defensive or start expecting a pullback. I am just playing out the scenarios for the future. And making sure I am alert to different possibilities. I do not want to get complacent. At the same time I do not want to start getting negative just because we have come up this far so fast.
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SPX Trending
At the end of the day, the charts tell a story. So, let us look at the SPX daily chart.
I have tried to keep it as clean as I can as I analyze the price action. I have 2 sets of drawings in the chart:
The first set are trendlines with angles - one descending trendline from the high reached in February and another ascending trendline from the low reached in April. We are above the ascending trendline and just below the descending trendline. To be fair, the descending trendline was updated Thursday at the high touched that day. So, it has been a moving target. Next week we want to see that price takes out that descending trendline and stays above that.
The second set of trendlines are the recent parallel lines where price has traversed over the last 7 trading days. The range is 5581 - 5699. Bulls have stepping in at the bottom of that range and bears have stepped in at the top of that range. For a positive outcome, we do need price to go to 5700 and above that.
These 2 sets of drawings will tell us next week who is winning going forward - the bulls or the bears.
Note that the 200-day moving average still remains elusive and is currently at 5748. All the price action of the last 7 days has been under that. So, that remains an important level to take out.
Also, we have made a higher low of late. But are yet to make a higher high. That high is at 5787 and if price can take that out, we will have made a higher high. But if price makes a lower low (under 5101 where the ascending trendline touches) before making the higher high, then we will be back to square one and the cycle will need to start all over again.
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Earnings
As I stated above and have stated in several prior notes, the stock market moves based on earnings growth estimates. During earnings season (like now), I tend to pay close attention to what is happening with earnings.
The raw data is available at Factset.com. From this latest note, here are the highlights:
“At this late stage of the earnings season, the S&P 500 is reporting strong results for the first quarter. Both the percentage of S&P 500 companies reporting positive earnings surprises and the magnitude of earnings surprises are above their 10-year averages. As a result, the index is reporting higher earnings for the first quarter today relative to the end of last week and relative the end of the quarter. The index is also reporting double-digit earnings growth for the second consecutive quarter.
Overall, 90% of the companies in the S&P 500 have reported actual results for Q1 2025 to date. Of these companies, 78% have reported actual EPS above estimates, which is above the 5-year average of 77% and above the 10-year average of 75%. In aggregate, companies are reporting earnings that are 8.5% above estimates, which is below the 5-year average of 8.8% but above the 10-year average of 6.9%.”
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Top Performing S&P 500 Stocks
I will leave you with something interesting. This does not necessarily help with predicting future stock price but provides a perspective with what has worked so far this year.
These are the top 50 so far. Do what you want with it.
Striking in this list is that not 1 in the top 50 are from the Magnificent 7 basket.
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Have a great week ahead.