Despite the Fed keeping rates high and the U.S. economy slowing in the first quarter, with 80% of S&P 500 companies already reporting, the benchmark index is on track for 5% growth in first-quarter earnings per share.
This represents the largest year-over-year increase since the second quarter of 2022 and is higher than the 3.2% analysts were expecting before the start of the season.
Looking ahead, bulls believe strong corporate earnings could continue to drive stocks higher this year. But, of course, that is largely dependent on the economy remaining stable in the coming months.
But what could spoil it all?
Well, it's already happening. First, these "amazing results" are not so much due to revenue growth as to cost-cutting, especially in the big tech companies, both last year and now.
Second, the outlook is already showing signs of attrition. A significant 55% of reporting companies offer lower earnings per share forecasts than analysts expected for the current quarter, well below the 10-year average of 63%.
Not surprisingly, at the end of the first quarter, Buffett's Berkshire Hathaway had a record $189 billion in free cash simply because there were no exciting opportunities to invest in.
It is worth noting that every time the investment guru accumulates cash while the Fed raises rates, there is usually a big crash in the 12 months that follow. It happened in 2000, 2008 and 2020, and there is a chance it could happen again under the "right" conditions.
So, what would it take for investor optimism to fade?
It would probably take a systemic collapse in the form of a significant crisis. It could come in the form of a collapse of regional banks, but given the upcoming presidential election, Democrats are unlikely to allow that to happen.
Alternatively, it could be a debt crisis, but we are still a long way from that.
And perhaps most importantly, the Fed needs to kick its money-printing habit. And if we're to believe Arthur Hayes, the former CEO of BitMEX, the US has quietly resumed its money-printing spree.
So, as long as there's cash flowing in the system and the market holds onto its rosy outlook, breaking the bullish trend won't be a walk in the park.
What's the game plan?
Keep a close eye on support and resistance indicators, and consider cashing out some of those extra-profitable positions when the opportunity arises. And remember, tread cautiously in the realm of speculation.