Here's one bullish factor the stock market can continue to rely on to limit future downside, DataTrek says

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  • 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.

Read the original article on Business Insider