Bullish Signals Mount as Q1 Earnings Surprise to the Upside
What a week it's shaping up to be. The S&P 500 and Dow Jones Industrial Average have each risen seven days in a row, and all signs point to an eighth consecutive gain.
It's a welcomed turnaround from the volatility we've seen recently. A notable breadth thrust has led to renewed buying pressure in stocks. At one point during this relief rally, we saw a 3-day stretch that featured 70% or more advancing issues in each session.
That's a relatively rare feat that has occurred only 28 other times dating back to 1950. And 27 out of 28 times, stocks were higher one year out from the date of each signal with an average return of nearly 19%. Furthermore, a rare Zweig Breadth Thrust (discovered by Marty Zweig) triggered last week, another sign that the bottom for this latest downward move is in. Breadth thrusts equate to more stocks participating in the ride higher.
Q1 Earnings Relieve Investor Anxiety
The first-quarter earnings season is now through the halfway mark with 256 S&P 500 members reporting results. Total Q1 earnings for these companies are up 14% from the same period last year on 4% higher revenues. Things will continue to heat up this week with tech giants Apple AAPL and Amazon AMZN dominating the slate.
After the bell yesterday, Facebook-parent Meta Platforms META and tech giant Microsoft MSFT both beat estimates on the top and bottom lines. Despite worries of an advertising slowdown amid tariff uncertainty, Meta delivered earnings of $6.43 per share on revenues of $42.3 billion, representing respective beats of 23.2% and 2.6% relative to consensus EPS and revenue estimates.
The social media company also provided upbeat revenue guidance, but did raise its full-year capital expenditure estimates. META shares were up more than 5% in early trading Thursday:
On a similar note, Microsoft surpassed its fiscal Q3 estimates on solid cloud bookings. Earnings of $3.46 per share marked an 8.1% surprise versus the $3.20/share Zacks Consensus Estimate. Microsoft Cloud revenue of $42.4 billion was up better than 20% year-over-year and was higher than the anticipated $42.2 billion. MSFT stock surged 9% at Thursday's open:
Image Source: StockCharts
Economic Data Puts Pressure on Fed to Act
The solid earnings numbers helped quell concerns regarding the economy after investors digested mixed signals on Wednesday.
An update on Q1 GDP showed the US economy contracted at an annual rate of 0.3%, according to data from the Commerce Department. The figure, which is adjusted for seasonal factors and inflation, came in lower than the 0.1% estimate.
It was the first quarter of negative growth since Q1 of 2022, a stark contrast to the 2.9% annualized gain we saw throughout the past two years. Imports soared 41.3% during the quarter, driven by a 50.9% increase in goods as companies attempted to get ahead of anticipated tariffs from the Trump administration.
The Fed's preferred inflation gauge – the core PCE index – came in flat over the prior month, below expectations of a 0.1% increase and the 0.5% gain seen in February. In the 12 months through March, core inflation was up 2.6%, in line with estimates.
President Trump's tariff campaign has stoked fears that the economy will enter a period of slow growth and resurgent inflation. Still, market participants are pricing in four rate cuts this year. Following the latest inflation data, odds of a rate cut in June climbed to roughly 67%.
Final Thoughts
After a remarkable and broad breadth thrust, the short-term trend has reversed back up. The data has begun to align with the possibility of a resumption of the longer-term bullish trend.
On the flip side, the latest gains have pushed the major US indexes near areas of potential resistance. After such a volatile and fast-paced correction, it is imperative to balance risk versus reward and manage downside effectively.
Bulls would like to see further positive reactions to earnings. Make sure to take advantage of all that Zacks has to offer as the first-quarter earnings season rolls on.
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