Market Rally Accelerates On Earnings Growth

Rush Zarrabian, CFA®
May 13
5 min read

Summary

Despite elevated geopolitical tensions and the continued closure of the Strait of
Hormuz, equities have climbed back to all-time highs as investors refocus on the
strength of corporate earnings and the broader economic backdrop. Companies
are beating profit estimates at an unusually strong pace, while earnings growth has
accelerated to levels rarely seen outside of post-recession recoveries.
Historically, strong and rapid market advances have tended to occur during
durable bull markets rather than near major market peaks. The recent rally has
already produced several rare momentum signals, including one of the strongest
three-week rallies in history and a double-digit gain for the S&P 500 in a single
month.
The broader outlook remains constructive, supported by resilient corporate
profits, improving margins, and continued investment spending tied to artificial
intelligence. At the same time, investors should remember that pullbacks are a
normal part of investing. Even during the strong market advance of the past three
years, the S&P 500 has experienced multiple declines of 5% or more along the way.
Our microcast™ signal remains at a neutral allocation. Taken together, our tactical
risk models continue to indicate a constructive backdrop for equities.

LINGERING GEOPOLITICAL RISK HAS NOT PREVENTED THE MARKET FROM REACHING NEW HIGHS

Despite elevated geopolitical risks and continued uncertainty surrounding the Strait of Hormuz, investor focus has increasingly returned to the resilience of corporate profits and the strength of the underlying earnings backdrop.

Simply put, the profitability of U.S. corporations has remained too strong for investors to ignore. Companies are beating earnings estimates at an 84% rate, while year-over-year earnings growth has reached 25%, a figure rarely seen outside of post-recession recoveries (data from Piper Sandler):

What makes this especially notable is that profit growth continues to strengthen even after an extended period of elevated interest rates. Many investors expected a more meaningful deterioration in corporate earnings by this stage of the cycle.

Over time, equity markets tend to follow the direction of corporate profits. As long as earnings growth remains healthy, the fundamental backdrop for stocks should remain supportive.

With the market at all-time highs and enthusiasm around artificial intelligence continuing to build, it is worth reminding investors that new highs are not bearish signals. Historically, markets have performed just as well following all-time highs as any other day (data from 3Fourteen):

BULL MARKETS TYPICALLY FEATURE SHARP, POWERFUL UPSWINGS

The scale and speed of the rally since the March 30 low has been reminiscent of the surge following “Liberation Day”, when the Trump administration reversed course on its initial tariff plans in April of last year. In several respects, this advance has been even more impressive.

First, the S&P 500 gained more than 10% in a single calendar month, a rare occurrence that has happened only 13 times since 1950. Historically, stocks have gone on to post solid gains in the months and years that followed (data from 3Fourteen):

Second, the market experienced one of the strongest three-week rallies in its history, climbing nearly 12% from the end of March through mid-April. Historically, advances of similar magnitude have rarely occurred near major market peaks (data from Charlie Bilello):

Lastly, the rally pushed the market to a year-to-date gain of more than 5% through April. Historically, strong starts to the year have not only led to solid returns over the remaining months but have also seen better-than-average returns during the often feared “Sell in May” period spanning May through October (data for next two charts from Carson):

This also serves as a good reminder that the widely followed “Sell in May” strategy has not been particularly effective in recent years:

That should not come as much of a surprise. Market anomalies that become widely known often lose their effectiveness over time.

THE OUTLOOK REMAINS CONSTRUCTIVE, EVEN IF THE ROAD AHEAD INCLUDES PERIODIC PULLBACKS

The combination of positive earnings growth, improving corporate margins, and significant capital spending tied to artificial intelligence continues to provide meaningful tailwinds for equities. Importantly, many of those tailwinds have been in place for several years.

Over that same period, markets have navigated a wide range of risks, including major bank failures, tariffs, and now a sharp rise in oil prices. At various points, each appeared capable of derailing the bull market, yet the broader uptrend remained intact.

It is important to emphasize that this has not been an easy advance to stay invested through. Since the start of 2023, the S&P 500 has experienced seven separate pullbacks of at least 5%, including one decline that approached 20% (data from Bespoke):

It serves as an important reminder that market declines are a normal part of investing, even during strong market advances like the one experienced over the past three years.

In summary, despite higher oil prices and lingering geopolitical tensions, the broader market backdrop remains supported by strong corporate earnings, resilient profit margins, and continued investment spending. History suggests that powerful rallies, strong starts to the year, and new all-time highs have more often been characteristic of durable bull markets than major market tops. That does not mean the path forward will be smooth, as periodic pullbacks remain a normal part of investing. But so far, the market has continued to demonstrate an ability to absorb negative headlines while responding positively to strong underlying fundamentals.

Important Disclosures

The chart(s)/graph(s) shown is(are) for informational purposes only and should not be considered as an offer to buy, solicitation to sell, or recommendation to engage in any transaction or strategy. Past performance may not be indicative of future results. While the sources of information, including any forward-looking statements and estimates, included in this (these) chart(s)/graph(s) was deemed reliable, Corbett Road Wealth Management (CRWM), Spire Wealth Management LLC, Spire Securities LLC and its affiliates do not guarantee its accuracy.

The views and opinions expressed in this article are those of the authors as of the date of this publication, are subject to change without notice, and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.

All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. macrocast™ and microcast™ are proprietary indexes used by Corbett Road Wealth Management to help assist in the investment decision-making process. Neither the information provided by macrocast™ or microcast™ nor any opinion expressed herein considers any investor’s individual circumstances nor should it be treated as personalized advice. Individual investors should consult with a financial professional before engaging in any transaction or strategy. The phrase “the market” refers to the S&P 500 Total Return Index unless otherwise stated. The phrase “risk assets” refers to equities, REITs, high yield bonds, and other high volatility securities.

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