I was just talking about the importance of picking stocks with strong fundamentals in a meeting when I came across this in an email from Bespoke Investment Group. Sometimes the market has a funny way of joining the conversation.
With more than 1,500 companies having reported their Q2 results on Wall Street, this is shaping up to be one of the strongest earnings seasons relative to expectations in the past couple of decades. So far, 77% of companies have reported earnings per share (EPS) above consensus estimates. That compares with an average beat rate of around 67% over the past ten years.
What caught my attention was not just the earnings beats. It was the guidance. More than 15% of companies reporting this season have raised their forward guidance compared with around 10% historically. The number is even more striking in technology. Nearly one in three technology companies that have reported so far have raised their guidance.
That is quite a contrast to the mood we saw in June and early July when the tech sell-off had investors questioning whether the AI and technology trade was finally running out of steam. The market was happy to give us something to worry about.
Once companies started reporting, the picture looked rather different. The market can sometimes get ahead of itself. Valuations can become stretched, sentiment can change quickly, and crowded trades can unwind just as quickly. Ultimately, companies still have to deliver. So far, many of them are.
This is why I continue to believe that, particularly in a market where some areas have become expensive, stock selection matters. I would rather own businesses with strong fundamentals, earnings momentum and the ability to deliver on their guidance than simply chase whatever happens to be popular at the time.
Markets will always have their ups and downs. The headlines will change, sentiment will change and there will always be another reason to worry. Eventually, the numbers have a way of telling their own story.