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A trader on the floor of the New York Stock Exchange the morning after the Dow Jones Industrial Average dropped over 1,000 points on Feb. 9, 2018.
Fear of higher costs, through higher interest rates, higher wages and higher raw material costs, has now become a major preoccupation for investors. But strong revenue growth, if it continues, may offset concerns that higher costs will erode profit margins.
We’re just getting started with earnings season, but the early signs are looking even better than the bulls were anticipating.
Tuesday’s big movers, including Goldman Sachs, Morgan Stanley, Comerica, UnitedHealth and Johnson & Johnson, all beat by wide margins. All these stocks are trading up.
With just 41 companies in the S&P 500 reporting so far (8 percent), 88 percent have beat on earnings, far above the roughly 65 percent that typically beat, with earnings growth of 25.4 percent, according to Earnings Scout. That would uphold a string of 20 percent or greater earnings growth that began in the first quarter and is expected to extend through the end of the year.
But the key to the market’s upward momentum may be in a related statistic: Revenue growth. It is what is needed to offset the potentially higher costs corporate America now faces.
Chief among those higher costs are higher interest rates, which will drive up funding costs. Last week’s market action clearly telegraphed that traders and fund managers are worried about a sudden spurt up in interest rates. Indeed, Bank of America/Merrill Lynch’s monthly report on fund managers’ biggest fears shows concern about the Fed tightening faster than expected is moving up on the list of the biggest fears. It is now almost tied with a trade war as the biggest threat to the market.