As we at Cornerstone find ourselves in the middle of earnings season and the heart of the most important economic data releases, today let’s take the time to do a checkup. We’ll then cover three momentum based datasets that provide additional positive historical foundation for the current bull market to continue.
First, and most importantly, let’s review where we sit with earning season, as of this writing, having 66% of S&P 500 companies reporting. Also keep in mind how this week is the second busiest week of earnings, with another 125 companies reporting.
So far, 84% of companies are beating earnings estimates. While that’s impressive, it’s more important that these companies are beating by a median of 7.2% to the upside:
For perspective, the initial expectations going into this quarter were for per-share earnings to grow by 5.8%. That means if the current surprise average holds, it implies an approximate 12.5% EPS growth rate for the second quarter:
If this holds throughout earnings season, it will extend U.S. earnings growth dominance over the rest of the world going back to 2019. The cumulative earnings growth for the S&P 500 outpaced every major country and region, with only India even coming close in the past three years.
We mention this because it's this earnings leadership (fundamentals) that’s fueled the outperformance of U.S. equities versus global stocks. While some feared this trend would falter as a result of the White House’s tariff policies, those market concerns have significantly subsided as objective data reaffirmed U.S. earnings dominance globally.
That being said, some may wonder if last week’s Federal Reserve decision and commentary about not cutting interest rates again directly creates any near-term market weakness. As our readers know, we had no expectation of the Fed not falling behind the curve for once.
We still don't believe this decision creates any new inherent market weakness risk. We firmly believe the market is looking through to 2026 in how it’s pricing equities. This thesis is reflected in the expectation of over 2.3 rate cuts in 2026, which implies that the Fed will have to catch up from its passive 2025 approach thus far:
To many, the market appears to continue to perform well despite an overall negative narrative thus creating the most hated V-shaped rally of all time.
But those who simply follow the data, rather than subjective narratives, have not been surprised as the economic data important to equity markets has been positive nearly across the board this year:
For those who’ve wondered why we’ve been comfortable contrarians this year, the visual above may help provide clarity. This year we’ve seen objectively bullish data consistently.
We’d also like to point out an important happening with real gross domestic product after the first-quarter contraction. Back then we thought it could be a blip on the radar due to a significant policy change and implementation.
Last week’s data seems to have confirmed that hunch:
Real GDP grew at a 3% annual rate, which was significantly above the 2.6% expectation:
Bringing this economic and earnings analysis full circle, let’s examine the most important data to come out of every earnings season: actual net profit margin (i.e., what companies make).
Net profit margin is especially important now given the concerns about tariffs and higher costs. Halfway through reporting season, we’re not seeing evidence of profit pain as the quarterly blended net profit margin for the S&P 500 is 12.3%, which is above the year-ago rate of 12.2% and the five-year average of 11.8%:
In fact, this is the fifth consecutive quarter the index’s net profit margin is above 12%. Even more interesting is that analysts think net profit margins will be even stronger the remainder of the calendar year.
To us, that’s further indicative of the market looking through any short-term bearishness to a strengthening fundamental picture across sectors:
While things seem uncertain in the news, we’re in the middle of a vast dump of data covering economics and earnings, and it’s hugely positive. That type of data is constructive. That’s not always the case, but it is right now.
Three Bullish Datasets
Even though we now have a clearer picture of the current fundamental and economic data, many pundits remain skeptical that this bull market rebound can continue. In other words, “the bottom must fall out.”
To help address those fears, let's look at history when it comes to momentum and momentum timelines within bull markets, especially after massive recoveries (the S&P 500 is up roughly 30% since the April tariff tantrum). Three datasets are particularly helpful.
First, since 1950 there were 23 corrections in the S&P 500 (declines of 10%-20%). Our friends at MoneyFlows illustrate how stocks have historically performed after they've recovered their correction losses:
As you can see, the S&P 500 has produced gains that are well above long-term averages. While perhaps surprising, this indicates there can be plenty of potential upside left considering the S&P 500 is up roughly 2.5% after recovering from the spring drawdown, as of this writing.
Next, many people think this bull market is well past its realistic timeline. Since 1938, there have been 19 S&P 500 bull markets. They’ve averaged just under four years and 133% gains during that period.
While there's a strong argument that we're in the very beginning of a new bull market, let's instead assume that isn't the case and this bull market began in October 2022. As such, we’re 2.8 years in and up only 80% thus far. Thus historical averages would indicate there is a full year and 53% of upside yet to come:
Nobody wants to miss out on that sort of performance. And as discussed above, it seems there is a fundamental foundation being built for extended bullishness.
Lastly, if this bull market began in October 2022, its fourth birthday is ahead. Why does this matter?
As you can see, history suggests there is a real acceleration in market gains in the fourth year of bull markets, with an average market-beating gain of 14.6%:
Perhaps most astounding is this is an acceleration from the historical 2.2% average in year three. We see many similarities between the chart above and today, hence the green V-shaped overlay.
All in all, we believe there is objective fundamental and economic data to support further bullish momentum when you tune out the noise.
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