Are Falling Stock Prices a “Buy Opportunity” Amid Expected Earnings Growth?

Market Analysis: Finding Opportunities Amidst Price Declines

As the prices of US and global market stocks decline, particularly those of the Magnificent 7, analysts and market consensus are expecting solid earnings growth from these companies.
Could the recent price drops be creating a new buying opportunity? Let’s take a closer look at the data.

What Has Driven the Stock Market Index Prices Down?

This month’s decelerations, highlighted by the predominantly US stock market, have sparked new concerns among market participants: the potential end of the two-year stock market rally.
A robust economy in the US seems to fuel the idea that the Fed may be forced to postpone further interest rate cuts.
This has triggered an initial wave of profit-taking, leading to a week of losses for the S&P 500 and Nasdaq, primarily driven by a decline in the prices of big-cap stocks, especially the so-called “Magnificent 7”.

Looking at May Earnings Expectations

The next two weeks will see the majority of US companies reporting their quarterly earnings, providing confirmation or not of the growth expectations priced in by traders on stock prices.
So far, most companies that have reported earnings have exceeded expectations, with about 74% surpassing estimates in the last week.
Attention remains focused, as usual, on the data shared by the Magnificent 7, with analysts expecting an earnings growth rate lower than that of the fourth quarter of 2023, but still significantly positive and above 30%, thus outperforming the average of recent years, according to Bloomberg data.
Essentially, the market is facing a rather challenging moment to interpret, with the prices of the top 7 US companies by market capitalization declining, while EPS is expected to increase compared to the past.

S&P 500: Is Concern Justified?

The contraction in the price of the US stock market index S&P 500 this month has generated widespread discontent, with CNN’s Fear & Greed index dropping to 42, entering the fear territory, an event not seen in a long time.
Technical oscillators are starting to unwind, and although on broad timeframes like the weekly one, the contraction appears mild, on shorter timeframes such as the daily one, a deeper contraction is noticeable: the RSI index reached 40 points on April 19 and then started to rise again, an event that has not occurred since the contraction in November last year.
Last week, the index recorded a rebound of 3%, and this week also started with a slight increase.