Did US stocks miss out on the "good news"? Earnings forecasts were unusually revised upwards; strategists say the fundamentals are "unbelievably strong."

There is a clear divergence between corporate earnings and US stock price performance: while fundamentals continue to improve, the market remains constrained by high interest rates and macroeconomic uncertainties, and earnings growth in some sectors has not yet been fully reflected in stock prices.

According to MarketWatch, Patrick Palfrey, head of portfolio strategy at Seaport Research Partners, said the current corporate earnings environment is exceptionally strong, with analysts continuing to revise their earnings forecasts upward. He pointed out that this situation is extremely rare in history, "almost beyond the realm of normal probability," which speaks volumes about the resilience of corporate earnings fundamentals.

However, the high-interest-rate environment continues to suppress valuation multiples, and coupled with investor concerns about earnings sustainability, the market's reaction to this fundamental positive is clearly insufficient. Palfrey points out that industrial and transportation stocks are particularly noteworthy , with the fundamentals of these companies rapidly improving, but their share prices have not yet reflected this, presenting a clear mispricing opportunity.

Meanwhile, interest rates and macroeconomic factors could still disrupt the market. The continued rise in oil prices is putting pressure on US stock indices, the yield on the 10-year US Treasury note has risen to 4.926%, and the Federal Reserve's interest rate decision next week remains uncertain, with the market currently betting on a rate hike at around 60%. Palfrey warned that if the Federal Reserve reiterates the necessity of raising interest rates, it could have a short-term impact on the stock market.

Strong earnings and upward revisions to forecasts set a new historical record.

Palfrey noted that S&P 500 earnings per share jumped 55% year-over-year in the second quarter, and still grew 35% excluding unrealized gains, a "very, very strong" performance. Earnings growth was primarily driven by technology companies, particularly the semiconductor sector, but he emphasized that the overall corporate earnings environment remains healthy.

More noteworthy is the direction in which analysts are revising their earnings forecasts. Palfrey stated that earnings forecasts are typically high at the beginning of the year and tend to be revised downwards as the quarter progresses, but currently analysts' forecasts are still being revised upwards, which is a clear departure from historical patterns.

“This situation is almost outside the realm of normal probability—which demonstrates just how strong the company’s fundamentals are,” he said. This trend is partly due to the continued advancement of artificial intelligence infrastructure construction and the structural growth in energy demand.

High interest rates are suppressing valuations, leading to divergence in market pricing.

Despite strong earnings fundamentals, Palfrey acknowledged that investors still face practical constraints when deciding on valuation multiples for companies based on earnings. He stated that the high-interest-rate environment, which pushes up capital costs and lowers price-to-earnings ratios, is one of the main reasons for the continued decline in valuation multiples this year; at the same time, investor concerns about whether the current high earnings growth can be sustained are further limiting valuation space.

He cited the dramatic fluctuations in software stocks earlier this year as an example: the market sold off heavily due to concerns that artificial intelligence could disrupt the traditional software industry, "criminalizing all companies before anyone did any due diligence," before these stocks subsequently regained favor with investors. This case demonstrates that mispricing driven by market sentiment is not uncommon.

Seaport identifies “reasonable” and “unreasonable” price fluctuations in the market by tracking the relationship between changes in earnings per share expectations over three months and stock price changes over three months. Palfrey stated that there is currently a significant misalignment in the industrial and transportation sectors: fundamentals are improving rapidly, but stock prices are not fully reflecting this.

He believes one of the fundamental reasons is that capital and investor attention have been completely drawn to the technology sector. "Technology has not only absorbed all capital investment, but also captured all of investors' attention." This means that other sectors may actually offer opportunities that are undervalued.

The Fed's decision is the biggest variable in recent times.

Palfrey stated that interest rates were a recurring topic in conference calls with institutional investors this week. He pointed out that in the past, investors tended to adopt a "wait and see" attitude when facing interest rate risks, but now the issue is being discussed in a more substantive way, taking into account factors such as rising capital costs, declining price-to-earnings ratios, and demographic changes.

Regarding next week's Federal Reserve interest rate decision, he warned that even though the market has already priced in a roughly 60% probability of a rate hike, it could still surprise the market if the Fed re-emphasizes inflationary pressures and the necessity of further rate increases.

"I think this will continue to dampen the recent stock market sentiment," Palfrey said. Currently, investors are focusing their daily trading on the AI development theme, showing relatively limited sensitivity to macroeconomic data. However, if the interest rate narrative changes, market optimism regarding earnings fundamentals could still be suppressed.

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