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Earnings season is halfway over and the results are surprisingly strong

Scott Gamm

What earnings recession?

Heading into the current first-quarter reporting season, earnings for S&P 500 (^GSPC) companies were expected to fall 3.9% year-over-year, the first quarterly decline since 2016, according to FactSet.

But with 46% of S&P 500 companies having reported first-quarter results as of Friday, earnings are expected to decline only 2.3% year-over-year. Plus 77% of companies that have reported so far this season have topped their earnings estimates, according to FactSet.

FILE - In this April 18, 2019, file photo traders Michael Urkonis, left, and Gregory Rowe, right, work on the floor of the New York Stock Exchange. The U.S. stock market opens at 9:30 a.m. EDT on Thursday, April 25. (AP Photo/Richard Drew, File)

“Despite fears of an outright ‘earnings recession’ (two quarters of negative year-over-year earnings), actual results have exceeded consensus estimates by 4.3% thus far, well above the historical average beat rate of 3%,” wrote UBS analysts in a note to clients Monday. “Huge beats from mega-cap tech-related companies [Amazon (AMZN), Facebook (FB), Microsoft (MSFT)] have been the key positive drivers.”

Some 164 companies are set to release earnings this week, including more big ticket tech stocks like Alphabet (GOOGL) and Apple (AAPL).

With first quarter earnings coming in better than expected, FactSet analysts expect earnings growth to improve further throughout the rest of the year.

  • Second quarter: decline of 0.6% year-over-year

  • Third quarter growth of 1.3% year-over-year

  • Fourth quarter growth of 8.1% year-over-year.

This all pushes the expected earnings growth for the full year of 2019 to 3.6%.

“With the S&P 500 now trading at approximately 17 times forward earnings, we believe US stocks are fairly priced and are already incorporating much of the improving profit picture that we anticipate later in the year,” the UBS analysts added. “Our six-month S&P 500 price target is 2,950 and we are neutral US equities in our tactical asset allocation.”

On Monday, the S&P 500 hit a record intraday high of 2,945, a stone’s throw away from UBS’s target.

That suggests that while the improving earnings picture may not be enough to boost the markets much from here, after a 17.3% rise year-to-date, it may be enough to keep this year’s rally intact.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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