The Stock Market Rally Keeps Going. Here’s What Could Halt It Later This Year.

The stock market rally this year has defied predictions. The second half of the year can either validate the market’s optimism—or ruin it.

The S&P 500 is up 29% from a recent low point in October, in a rally that has included more than just a few Big Tech stocks. The narrative is that corporate earnings can increase and that the Federal Reserve won’t damage the economy, which continues to grow amid expectations for interest rate cuts this year.

The mood persists despite a trickle of higher-than-expected inflation data over the past three months that has the Fed holding off on its first rate cut. And yet the market so far has forgiven any news that could have pushed stocks lower.

Based on current consensus analyst forecasts for S&P 500 quarterly earnings, profits will rise this year and accelerate throughout the year. That’s partly because many companies have issued strong outlooks for the second half as demand just hasn’t gotten hit hard enough from higher rates.

“While there is clearly concern that an eroding economy could cause downward revisions, optimistic investors can rightly point to companies where Q1 estimates have been lowered, but full year 2024 guidance has not been reduced,” writes Trivariate Research’s Adam Parker. “This in effect creates an ‘implied’ second half of 2024 guidance that is perhaps excessively optimistic.”

After 2023 saw S&P 500 aggregate earnings per share grow not even 2%, analysts expect S&P 500 earnings per share to rise 11%, to $242, this year. That would come on the back of mid-single digit sales growth for the group, slightly higher profit margins as cost inflation subsides, and share buybacks.

That narrative relies heavily on the second half of the year. Analysts see the S&P’s first half earnings per share at $114. If companies sustained exactly that pace, full-year earnings would be on pace to hit just $228 a share, falling short of the current 2024 projection.

Instead, analysts are forecasting second half earnings of $128 a share for the S&P 500, growth of 12% from the first half. That represents the fourth largest second half rebound in the past 20 years, according to Trivariate. The average jump is 0.3%.

That’s why, for stock prices, the second half of the year is when the rubber hits the road. If earnings fail to accelerate, that could easily be the negative news that catalyzes a market drop.

“When you’re at these elevated valuations, there’s less room for forgiveness [of negative news],” says Lori Calvasina, chief U.S. equity strategist at RBC Capital Markets.

Stock investors are hanging their hats on a second half improvement in earnings. If it doesn’t see that acceleration, stocks will have nowhere to go but down for a bit.

Write to Jacob Sonenshine at [email protected]