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The main driver of stock prices is on the rise

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In August, the stock market suffered its first dip of 2023, when the index fell 1.7%.

And market history shows that September is the worst month of the year since World War II.

But in the midst of this market instability, the main driver of long-term stock market performance has been improving. And those are corporate profits.

“At the end of Q2 earnings season, have analysts lowered Q3 earnings estimates more than usual for S&P 500 companies?” FactSet’s John Butters asked in a note published Friday.

“The answer is no.”

Butters notes that in July and August earnings estimates for Q3, Q4 and the remainder of 2023 were raised, as were full-year 2024 forecasts.

This is remarkable not only because long-term earnings are the main driver of stock prices, but also because analyst estimates tend to be revised lower during the first two months of any given quarter.

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FactSet data shows that S&P 500 companies’ earnings expectations have typically fallen 2.7% in the first two months of a quarter over the past decade. Over the past fifteen years, the decline has been even greater: 3.4%.

The last time earnings in the first two months of a quarter were revised upwards was in the third quarter of 2021.

Earnings expectations for 2023 were steadily revised upwards in July and August. (Source: FactSet)

The second quarter earnings season is all but complete and will mark the continuation of the ongoing earnings recession.

Earnings of S&P 500 companies fell 4% year over year in the second quarter, according to data from FactSet. This is an improvement on the 7% decline in the first quarter of the year.

But the company notes that while corporate earnings have continued to fall from 2022 levels, analysts are increasingly optimistic about the outlook for the rest of this year and for 2024.

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