Earnings are generally moving stocks to the upside again.
The 710 companies that reported quarterly results last week saw a 2.3% gain in the trading session following their release, according to Bespoke Investment Group. That's one of the best readings in the last 20 years.
Additionally, analysis from Bank of America shows that companies that beat Wall Street's expectations for both profits and revenue in the current reporting period are seeing their best next-day stock reaction since the third quarter of 2022.
"I think a little bit of that [change in earnings narrative] has to do with the Fed being not as hawkish, and if the Fed is actually done or almost done, then people can start focusing more on earnings, which were fine," Bank of America US and Canada equity strategist Ohsung Kwon told Yahoo Finance.
"I didn't see many cracks this earnings season."
The biggest shift in earnings driving stocks higher over the past week hasn't actually been from earnings themselves. As Yahoo Finance's Myles Udland flagged last week, earnings had been producing lackluster stock returns as investors remained more focused on soaring bond yields and what might come next from the Federal Reserve.
But as the current market consensus has shifted over the past several trading sessions, investors appear less worried about the headwinds that drove stocks lower in October. As of Monday afternoon, markets were pricing in a roughly 90% chance the Fed holds interest rates steady in December, up significantly from the 58% chance seen a month ago.
Read more: What the Fed rate-hike pause means for bank accounts, CDs, loans, and credit cards
The moves over the past week "changed the market psychology," according to Evercore ISI's Julian Emanuel. With some major headwinds at bay for now, investors can digest what's expected to be the first quarter of positive earnings per share growth for S&P 500 companies since the third quarter of 2022.
DataTrek research defined the story investors will likely find for third quarter earnings as one of “excellent earnings but lackluster revenue growth.”
Bank of America's numbers show that after 405 S&P 500 companies have reported, the index is expected to report 4% profit growth with real sales falling 2%. Earnings calls also showed a near record of "weak demand" mentions, per BofA.
But Kwon and BofA believe that the ability of these companies to produce profits despite weaker demand is a key takeaway moving forward. To Kwon, it shows companies' year of efficiency amid the corporate earnings recession was well spent removing excess expenses and improving cost structures to boost margins.
This could be key if the economic slowdown projected by many comes in 2024.
"We think margins have bottomed and the overall profit cycle has bottomed," Kwon said. "And if that's the case, companies have already anticipated this coming recession. They have adjusted their cost structure already.
"So even if we start to see the economy cooling more meaningfully, we think that earnings are going to be much better than the overall economy."
Josh Schafer is a reporter for Yahoo Finance.
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