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Week Ahead: Market optimism fueled by surprising US earnings reports

May 7, 2024
Charging Bull sculpture in Wall Street, New York, surrounded by tourists with a clear winter sky, symbolising bullish market trends in trading

This week, the financial markets have displayed resilience, particularly evident in U.S. stocks buoyed by an impressive earnings season—the most robust in nearly two years.

The S&P 500 reported a notable 5% year-over-year growth in earnings per share for Q1 2024, marking the largest increase since Q2 2022.

Corporate net profit margins have ascended to 11.7%, surpassing the five-year average, indicative of effective cost management across various sectors.

This is particularly noteworthy, especially when it comes amidst challenges like persistent inflation and the Federal Reserve’s signals of maintaining elevated interest rates for a more extended period.

However, the surge in market performance is largely tied to better-than-expected corporate earnings for the first quarter of 2024.

The strength observed in U.S. corporate earnings suggests a healthy economic backdrop, which theoretically supports the USD’s performance against a basket of major currencies.

Nevertheless, the Federal Reserve’s firm stance on interest rates might counterbalance this strength, as prolonged higher rates could dampen growth prospects and diminish the dollar’s appeal.

USD performance analysis

EUR/USD: This pair may experience heightened volatility as the euro navigates between the USD’s earnings-driven strength and policy directions from the European Central Bank.

USD/JPY: Despite the majority opinion (65.61%) betting on its decline, with a ratio of 1.91 to 1 favoring a drop, the USD/JPY pair might see an upward trajectory if U.S. corporate health continues to indicate domestic economic vigor.

GBP/USD: The sterling could be pressured downwards if the USD’s strength persists, especially with ongoing political uncertainties in the UK influencing the GBP.

Investors and traders are advised to keep a close watch on the ongoing earnings season, as further positive surprises might lend additional support to the USD.

Subject to change

Any changes in the Federal Reserve’s tone or unforeseen global economic disruptions could swiftly shift market dynamics. Adopting a balanced approach that incorporates both technical analysis and macroeconomic insights will be crucial.

As the second quarter progresses, attention will increasingly turn towards forward earnings guidance. The current positive revisions in earnings forecasts suggest potential continued market strength.

With analysts maintaining an unusually optimistic outlook on earnings projections, any deviation from these expectations can introduce volatility, a factor traders should take note of as it presents both risks and opportunities in the market.