U.S. Stocks Approach Record High as Low Earnings Expectations Spark Rally

The Dow and broader U.S. stock market inched closer to record highs on Friday after two of Wall Street’s biggest banks reported much better than expected profitability, proving once again that positive earnings surprises are rarely difficult to come by.

Dow Surges; S&P 500 Approaches Record Territory

All of Wall Street’s benchmark indexes posted impressive gains in the final session of the week. The Dow Jones Industrial Average surged 269.25 points, or 1% to 26,412.30. More than two-thirds of the index’s 30 members reported growth, with Walt Disney Co (DIS) surging more than 11% on details of its new streaming service.

The broad S&P 500 Index of large-cap stocks gained 0.7% to 2,907.41, the highest since early October. The index is less than 20 points away from record highs.

Financials led ten of 11 primary sectors higher. Materials, industrials and communication services also outperformed the broader market, climbing at least 1.2% each.

Meanwhile, the technology-focused Nasdaq Composite Index rose 0.5% to settle at 7,984.16.

Bank Earnings Surprise to the Upside

Corporate earnings season began in earnest on Friday after JPMorgan Chase & Co (JPM) and Wells Fargo & Co (WFC) reported their financial results. JPMorgan said its profits rose 5% to $9.18 billion in the first quarter, which translates into $2.65 per share. Revenues climbed to $29.12 billion from $27.91 billion in the same quarter a year ago. Analysts had called for per-share earnings of $2.35 on revenue of $28.47 billion.

Wells Fargo posted an earnings per share of $1.20 on revenue of $21.61 billion. Analysts forecast an EPS of $1.10 on revenue of $20.99 billion.

Although Q1 is expected to mark Wall Street’s first earnings decline in three years, one cannot help but wonder if the prognosticators have set the bar purposely low. Over the past three years, FactSet data have consistently shown that around three-quarters of S&P 500 companies report better than expected profit results. Perhaps investors should be looking more closely at the actual forecasts to see if they have any merit. After all, earnings beats usually translate into higher stock prices, something corporate executives are paid to engineer.

Nevertheless, earnings season picks up next week with Goldman Sachs Group Inc. (GS), Citigroup Inc. (C), Bank of America Corporation (BAC) and Morgan Stanley (MS) set to report.

U.S. Consumer Sentiment Fades

A closely-watched survey of consumer optimism fell more than expected this month, a sign that the U.S. economy was heading for a soft patch more than one year after President Trump’s tax cuts were implemented.

The University of Michigan’s consumer sentiment index, a barometer of household comfort and willingness to spend, fell to 96.9 in April from 98.4 the previous month. Analysts in a median forecast called for a slight drop to 98.0.

The survey results suggest that consumers believe President Trump’s tax-cut stimulus has run its course. “What has been of increasing importance to consumers are rising nominal incomes, and low inflation, producing strong gains in inflation adjusted incomes,” survey director Richard Curtin said.

Household optimism is directly tied to perceptions about consumer spending, which drives more than two-thirds of the U.S. economy. The good news is wages have picked up significantly under President Trump while unemployment and layoffs have declined.

Featured image courtesy of Shutterstock. Chart via Stockcharts.com.

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi