There's one line of thinking that goes that the market has rallied only because of the Fed. And that when the eventual Fed tightening comes into view, markets will tumble.
The other view is that the market represents fundamental economic and market improvement.
In his latest Weekly Kickstart note, Goldman's David Kostin relays some observations from earnings season that should make the latter camp very happy. Basically they show that fundamentals are strong, and improving, and suggest that there's more to the market than just the Fed.
Here are a few of the key ones:
— We estimate S&P 500 2Q 2014 operating EPS at $29.44, 12% growth versus 2Q 2013. S&P 500 2Q EPS is tracking 3% above the consensus estimate at the start of the reporting season. Our full-year forecast of $116 implies downside to the bottom-up consensus estimate of $118. Our forecast implies 7% earnings growth in 2H 2014 versus 9% growth in 1H.
— S&P 500 margins expanded to a new historical high of 9.1%. Margins exited the 50 bp range between 8.4% and 8.9% for the first time in four years. Trailing four-quarter margins expanded by 17 bp versus 1Q 2014. The Information Technology and Health Care sectors were the largest contributors to index level margin expansion. Margins declined for only one sector, Energy, while Consumer Discretionary margins were unchanged.
— Management guidance has been less negative than usual. Only 69% (56 of 81) of the firms provided 3Q guidance below the midpoint of consensus estimates. The ratio is below the historical average of 71% and notably less than the trend in recent quarters of 80%-90%. This is the first below-average quarter since 1Q 2012.
Kostin also notes that some common themes on conference calls include the improving company, more corporate spending (on capex and buybacks) and rising inflationary pressure).
Overall, earnings commentary and facts point to a corporate sector that continues to improve, bolstering the case for stocks.