When economic growth slows down and corporate earnings growth increases, it is favorable for the stock market.
According to financial experts at Bank of America Securities, the most favorable outcome for the stock market would be for the growth rate of Gross Domestic Product (GDP) to decline along with the growth rate of income.
In a financial analyst report on Tuesday, the bank stated that the current phase of the stock market is different from the general economic trend.
“While GDP and employment appear to be expanding at a slower pace, earnings growth is picking up (earnings per share (EPS) over the past twelve months are up 3% year-over-year),” the report from Bank of America (BofA) pointed out. “In addition, there is evidence of a strong uptrend in equities, according to three quantitative models from BofA.”
With first-quarter earnings reports for the S&P 500 nearing completion, EPS beat the median forecast by 31TP3M and was up 71TP3M year-over-year.
Bank of America noted that while the top seven companies contributed significantly to the higher earnings, the remaining 493 companies also performed well, with earnings in all 11 industry sectors exceeding expectations, with the exception of Healthcare.
“Historically, equities have performed best when there is a combination of slowing GDP growth and accelerating EPS growth,” BofA experts noted. “The main driver of this divergence appears to be an improvement in manufacturing versus a slowdown in the services sector. With the manufacturing recovery underway, we believe that solid fundamentals will continue to drive equities.”
Source: Investing
