The stock market is relying on its earnings power to limit further downside, according to a note from DataTrek.
The research firm highlighted that as the S&P 500 trades sideways for nearly two years, earnings are almost unchanged despite soaring interest rates.
The S&P 500 continuing to deliver $200+ in earnings per share “should limit US equity market volatility,” DataTrek said.
The stock market can rely on its earnings power to help limit future downside volatility, according to a Monday note from DataTrek Research.
With the S&P 500 hovering right around the all-important 4,000 level, the index is trading at the same level it did nearly two years ago.
But a lot has changed since then, namely interest rates and growing fears of an economic recession.
In April 2021, when the S&P 500 first crossed the 4,000 level, the 2-year US Treasury yield was just 0.1%. Fast forward to May 2022 when the index broke below the 4,000 level as the Federal Reserve was aggressively hiking interest rates, the 2-year US Treasury was at 2.6%.
Today, as the S&P 500 attempts to reclaim that 4,000 level, the 2-Year US Treasury yield is sitting at multi-year highs of 4.8%, with expectations that it could move higher as the Fed prepares for more interest rate hikes.
But there has been one important constant whenever the S&P 500 has traded around 4,000, and that’s its earnings power, DataTrek co-founder Nicholas Colas highlighted. The S&P 500 earned an annualized $209 per share in April 2021, and today it’s on track to earn $210 per share.
“Current year earnings power is the one notable constant as the S&P has transited through 4,000 numerous times over the last +2 years,” he said. “This level does seem to be something of a home key for US large caps since the start of 2021.”
And as long as S&P 500 earnings hold steady and the index trades flat, that could be a solid win for the bulls as many investors expect big downside ahead.
“S&P 500 earnings of $210 to $220 per share have been the market’s anchor as market sentiment shifts. Barring an exogenous shock and/or a sudden change in the cadence of US/global economic activity, markets will likely continue to believe that S&P earnings can hover around $200 per share,” Colas said.
“This should limit US equity market volatility, even if further modest declines seem likely in our view,” he concluded.
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