Broadening out of rally beyond tech to continue to offset fading rate cut bets

May 04, 2024 07:08 AM AEST | By Investing

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Broadening out of rally beyond tech to continue to offset fading rate cut bets

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Investing.com -- The 'Magnificent Seven' stocks may have led the broader market rally, but the string of stronger Q1 earnings from sectors beyond megacap tech show that the rest of the market is closing the gap and will continue to catch up and help cushion the blow from dwindling rate cuts bets.

"The Q1 earnings season has been relatively strong, with companies faring well compared to analyst expectations," Oxford Economics said in a recent note. "We think this fundamental strength will provide support for equities as Federal Reserve rate cuts are delayed," it added.

More than half of S&P 500 companies have reported quarterly results so far, Oxford Economics added, and of those, an "above-average 78% have beaten analyst expectations for EPS with an average upside surprise of almost 10%"

Unlike in past quarters, the slew of positive earnings has been accompanied by strong guidance, forcing analysts on Wall Street to turn more bullish on the road ahead for earnings growth, pushing the earnings growth forecasts, looking forward 12 months, into positive territory.

For the past few quarters, the Magnificent 7 stocks-- including NVIDIA Corporation (NASDAQ:NVDA), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), Tesla (NASDAQ:TSLA), Microsoft Corporation, Meta Platforms, Amazon.com Inc -- made up nearly all of the earnings growth, prompting many to suggest that this cohort of stocks is the be all and end all for the broader market.

But the upside surprises from other sectors, mean "the rest of the market is now on track to return to growth in Q1 ... and the "growth gap between the Magnificent Seven and the rest is expected to close by end-2024," Oxford Economics said, flagging the recovery in the manufacturing sector as a key catalyst for the recovery in earnings growth.

Goods producers suffered a heavy blow from elevated interest rates and an extending destocking cycle - following the unwinding of the pandemic-era spike in goods demand - that severely blunted their earnings growth, but "leading indicators suggest they are through the worst," according to Oxford Economics.

Others agree, and also expect the rally to continue to broaden out.

"Our thoughts were that the rally would broaden out which ended up occurring and then year to date, you're still seeing the rally broaden out a little bit," Chris Barto, Investment Analyst at said in an interview with Investing.com's Yasin Ebrahim on Wednesday.

"In the first quarter, regional banks and energy were some of the best performers. We think that sectors like that should continue to perform well," Barto added.

This article first appeared in Investing.com

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