When determining stock prices, corporate profits trump most other factors. (Remember the good old days, when “trump” was just a word without political connotations?)

It’s not just market sentiment or macroeconomic headlines that drive valuations—it’s the hard numbers. Profits fuel the engine of stock performance, providing the tangible results that investors seek.

Below, I examine the good news about corporate bottom lines during second quarter 2024 earnings season.

The PPI shows further cooling…

Inflation is a focal point for markets this week, with the release of the producer price index (PPI) and consumer price index (CPI) data.

The PPI was anticipated to show a year-over-year increase of 2.3%, slightly lower than the previous month’s 2.6% rise. The actual numbers came in better today.

The U.S. Bureau of Labor Statistics reported Tuesday that the PPI increased 0.1% in July, less than 0.2% forecast. Core PPI excluding food and energy was flat. On a year-over-year basis, headline PPI rose 2.2%, a sharp drop from the 2.7% reading in June. The PPI measures wholesale inflation and is considered a leading indicator.

The CPI, scheduled for release on Wednesday, is expected to hold steady at a 3% year-over-year increase, mirroring last month’s figures. Core CPI is projected to tick up by 3.2%, down slightly from the previous 3.3% reading.

While inflationary pressures were more pronounced earlier this year, recent data suggests moderation, paving the way for the Federal Reserve to ease interest rates as early as September. Wall Street is betting on a 100-basis point reduction by the end of the year.

Inflation has been cooling, but unexpected spikes in the monthly numbers are usually enough to send stocks tumbling. However, these unpleasant surprises amount to post-COVID “white noise” that belie the underlying trend of falling inflation.

Amid these inflationary concerns, Wall Street has another compelling narrative: the robust health of corporate earnings in the second quarter. As the earnings season draws to a close, with 91% of S&P 500 companies having reported, the results have been impressive.

Earnings are on track to grow by a substantial 10.4% year-over-year, marking the strongest performance since Q4 2021. The technology, utilities, and health care sectors have been standout performers, each expected to deliver over 18% earnings growth.

This Q2 profitability has brought a few disappointments among the mega-cap tech names, but not enough to undermine the generally positive narrative. That said, jittery Wall Street is in a “show me” mood more than usual.

According to FactSet, companies that have reported positive earnings surprises for Q2 2024 have seen an average price increase of 0.8% two days before the earnings release through two days after the earnings release. This percentage increase is below the five-year average price increase of 1.0% during this same time frame for companies reporting positive earnings surprises.

On the other hand, companies that have reported negative earnings surprises for Q2 have experienced an average price decrease of 3.8% two days before the earnings release through two days after the earnings release. This percentage decrease is larger than the five-year average price decrease of 2.3% during this same window for companies reporting negative earnings surprises (see chart).

Q2 profitability underscores the resilience of corporate America this year and serves as a critical counterbalance to inflationary worries. Judging by improving market breadth, it’s clear that strong earnings across multiple sectors will likely support a more diversified leadership in the equity markets in the months to come.

The S&P 500 is projected to achieve over 10% earnings growth for full year 2024, with nine out of eleven sectors expected to see positive results. This widespread profit growth suggests that the foundation for market strength is solid, overshadowing concerns about inflation and economic uncertainty.

What’s more, net profit margins in Q2 have been solid, suggesting that corporations have been adept at coping with inflation without hurting sales or earnings. This adaptability will boost profits even further down the road, as inflation continues to wane.

In response to the latest favorable PPI report, the main U.S. stock market indices soared higher Tuesday and ended the session as follows:

• DJIA: +1.04%
• S&P 500: +1.68%
• NASDAQ: +2.43%
• Russell 2000: +1.61%

The soft inflation data boosted hopes for a rate cut when the Federal Open Market Committee (FOMC) meets next month. The benchmark 30-year U.S. Treasury yield fell 0.76% to close at 4.16%. The CBOE Volatility Index (VIX) plunged more than 12.75% to hover at 18.07, a clear sign of diminished stress and fear in the markets.

Falling inflation and rising corporate profits are a bullish combination. Markets climb a wall of worry (as the old adage goes) and better-than-feared inflation data has served as a sturdy ladder.

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Robert Rapier is the chief investment strategist of Utility Forecaster, Income Forecaster, and Rapier’s Income Accelerator.

Robert is one of the world’s foremost experts on energy and income investing, but his deep knowledge also extends into other profitable segments, such as artificial intelligence (AI). Robert is a polymath who consistently delivers results for his subscribers.

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John Persinos is the editorial director of Investing Daily.

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