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Here's why 'bad' news in the economy hasn't rattled stocks, according to DataTrek

Markets Insider 2/16/2023 (Phil Rosen)
Traders work on the floor of the New York Stock Exchange shortly after the start of trading August 6, 2014. REUTERS/Lucas Jackson © REUTERS/Lucas Jackson Traders work on the floor of the New York Stock Exchange shortly after the start of trading August 6, 2014. REUTERS/Lucas Jackson
  • There's a reason why stocks have remained stable despite recent economic data, according to DataTrek. 
  • A key has been that corporate earnings have stayed resilient, the firm said. 
  • "The market we have wants to focus on corporate earnings and is confident still-rising interest rates will not cause a recession that damages fundamental earnings power."

Markets have remained stable despite recent economic data that suggests the Federal Reserve will have to maintain restrictive monetary policy for longer.

Specifically, monthly reports on payrolls, consumer prices, and retail sales came in higher than expected, indicating that the Fed's efforts to cool the economy are insufficient.

Yet stocks are up this year and have shown little volatility, and "the only explanation that makes sense to us for this conundrum of 'bad' news and stable markets is that US corporate earnings power remains resilient," according to Nicholas Colas, cofounder of DataTrek Research.

In fact, the CBOE VIX Index is at about 19.4 and remains below its long-run average of 20 — which leaves corporate earnings as the main support for stocks right now, in his view.

DataTrek, FactSet © DataTrek, FactSet DataTrek, FactSet

To be sure, the fourth-quarter reporting season has been disappointing, but the S&P 500 is still expected to earn $53.34 a share in the fourth quarter, he wrote in a Thursday note. 

That's nearly identical to what analysts expect over the first half of this year, meaning S&P 500 earnings are relatively stagnant but still 31.4% higher than the 2018-2019 quarterly average, Colas noted. 

"Yes, interest rates are higher and that should cut into valuations," he wrote. "But if $53/share ends up being 'trough' S&P earnings, one can understand why equity markets are shrugging off higher interest rates."

For now, stocks appear focused on corporate earnings and are behaving as if the Fed's still-climbing interest rates won't tip the economy into recession that weighs on earnings. 

"The old trader's saying that 'you trade the market you have, not the one you think makes sense' is especially true today," Colas concluded. 

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