S&P 500 hits new highs as earnings beat estimates

Better-than-expected earnings growth is driving the S&P 500 to new highs. The surge is led by a diverse group of companies including Uber Technologies Inc. NYSE:UBERCVS Health Corp. New York Stock Exchange: CVSConocoPhillips NYSE:COPHershey Company Inc. NYSE:HSY and Walt Disney Co. NYSE: DISall exceeding analysts’ earnings forecasts.

The latest earnings reports from S&P 500 companies, as a group, exceeded expectations. The SPDR S&P 500 ETF Trust Fund NYSEARCA: SPY

There has been a marked improvement in S&P 500 earnings per share since January 19, according to research from data analytics firm FactSet.

“The primary reason for the earnings improvement is that more companies beat EPS estimates, and by a wider margin after Jan. 19 than before Jan. 19,” FactSet’s John Butters wrote.

He added that through Jan. 19, in total, S&P 500 companies had reported actual earnings 17.8% below estimated earnings.

Big financial stocks missed EPS views

Financial stocks, which are typically among the first companies to release fourth-quarter results, “accounted for the majority of this below-average performance relative to estimates,” Butters wrote.

For example, JPMorgan Chase earnings reveal that the financial giant had missed earnings forecasts by 69 cents per share. The stock has rallied since the Jan. 12 report was released.

Wells Fargo & Co. New York Stock Exchange: WFC earnings missed views by 86 cents per share. Wells Fargo shares have been trending down since the Jan. 12 report and have traded slightly higher in the weeks since.

On the bright side, insurance giant Chubb Ltd. New York Stock Exchange: CB was among the S&P financial stocks that reported a positive earnings surprise. Because it comes from an unglamorous corner of the financial industry, Chubb doesn’t get much attention, but the stock is up 8.43% over the past month, outpacing the broader market.

10 S&P sectors reporting positive results

Since FactSet’s Jan. 19 earnings calculations, multiple companies representing the other 10 S&P sectors have reported quarterly results. With these new results, the index’s performance compared to estimates has improved.

Between January 19 and February 5, 75% of S&P 500 companies reported actual earnings per share above estimates, according to FactSet. Overall, S&P 500 companies reported actual earnings that beat estimates by 7.3%.

“As a result, ten of the eleven sectors now have higher earnings growth rates (or smaller earnings declines) today than on January 19, led by the information technology, energy, healthcare and consumer discretionary sectors” , according to FactSet.

Technology stocks contributed the most to the earnings surge, with positive earnings surprises coming from tech titans including Microsoft Corp. NASDAQ:MSFTThe Apple company. NASDAQ:AAPLQualcomm NASDAQ:QCOM and Intel Corp. NASDAQ: INTC.

Energy, healthcare and consumer stocks beat EPS forecasts

Among energy stocks, companies with positive earnings surprises include Exxon Mobil Corp. NYSE:XOMMarathon Petroleum Corp. New York Stock Exchange: MPC and Chevron Corp. New York Stock Exchange: CVX.

The healthcare sector is the third largest contributor to this earnings increase, accounting for about $2.4 billion of the $16.0 billion net earnings increase, according to FactSet.

Pfizer Inc. NYSE:PFE continues to lag behind the SPDR Fund for the selected healthcare sector NYSEARCA: XLV and the broader S&P 500, but managed to beat earnings forecasts by a comfortable margin when it was released on January 30.

When it comes to consumer discretionary stocks, Amazon.com Inc.’s earnings NASDAQ:AMZN it beat analysts’ opinions by 19 cents per share, contributing significantly to S&P’s overall earnings rise.

From the communications services industry, Meta Platforms Inc. NASDAQ: META and Alphabet Inc. NASDAQ:GOOGL they beat analysts’ earnings forecasts for the fourth quarter. Because they have such a large weight in the S&P 500, they have contributed significantly to the index’s total earnings increase since January 19th.

Market sentiment bullish, but use caution

The S&P 500 Index’s earnings surge not only defied previous predictions, but also sparked a wave of bullish sentiment among investors, with the SPDR S&P 500 ETF Trust NYSEARCA: SPY up 3.2% from the close on January 19th.

While analysts are predicting strong earnings growth for many S&P companies, keep in mind that cost cuts, the polite term for layoffs, have been responsible for some of the earnings growth. You would rather see revenue growth as the key driver, which in many cases it still is.

Additionally, the S&P is up 21.81% over the past year. There may be more room to run, but it is typical to see a pullback after a rally between 20% and 25%.

Overvaluation could become a problem in the not-too-distant future: According to Yardeni Research, the forward price-to-earnings ratio of the S&P 500 is 20.4. That doesn’t mean a correction will happen tomorrow, but it’s something investors need to keep an eye on, even if earnings growth remains strong.

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