Indiana Trust Wealth Management
Investment Advisory Services
by Clayton T. Bill, CFA
Vice President, Director of Investment Advisory Services

  • The U.S. equity market, represented by the S&P 500 index, rose 4% for the week.
  • The second-quarter earnings season is coming to an end, with more than 90% of companies reporting - and it was a very good one for US companies. 

A few weeks ago, the US stock market experienced a violent bout of volatility, ultimately selling off over 8% from its July peak. Given inflation is dwindling and the unemployment rate is rising, the Federal Reserve’s reluctance at its last meeting to commit to cutting interest rates led to investor consternation. Stock market volatility spiked, which created pressure on large leveraged bets that volatility would remain low. Margin calls ensued. Those factors, plus healthy doses of “animal spirits” and “who knows?”, seem to explain the downswing.

From that trough, the market has sharply rallied, if not quite all the way back to its July high. Weekly jobless claims have come in on the low side, and inflation data this week was soft, evidence that the economy is cooling rather than falling off a cliff. The unemployment rate’s rise may be due to higher levels of labor force participation, which creates a different economic environment than if mass layoffs were the cause. (That said, although this is a more benign driver for the rise in unemployment, perhaps the Fed should consider the cost of a new labor force entrant unable to find work.)

Investors may be mollified by recent economic data, but there is another more straightforward reason to consider for the market’s rebound: corporate earnings have been very good. “S&P 500 operating earnings per share (EPS) rose y/y in Q2 to a record high,“ Ed Yardeni and Eric Wallerstein of Yardeni Research observed on Monday.


Source: Sherwood News, August 15, 2024

Market valuations, such as the P/E ratio, have risen this year, becoming more expensive. After several quarters of steady sales per share growth (in the chart below, SPS YoY) and slower EPS growth (EPS YoY), consensus estimates (Fwd Consensus) suggest that earnings are in the process of accelerating. If growth materializes as expected, current elevated valuations may be justified.  


Sources: Sam Ro, FactSet, Morgan Stanley Research

Incoming economic data points in the coming weeks may drive more volatility, but for now it appears that fundamentals are providing support for share prices.

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