The last earnings season was all about raising expectations for earnings on the back of corporate tax cuts, share buybacks, and a synchronous global economic expansion.
A lot has changed in the last three months, according to Nick Raich of Earnings Scout. "Last earnings season it was all about raising estimates. This earnings season, all we want to see is companies maintain their EPS estimates."
That may seem like a real downgrade in expectations, but Raich disagrees. Second quarter earnings for the S&P 500 are expected to increase by 20 percent, not far off the first quarter's 26 percent growth. And estimates of 23 percent and 20 percent growth for the third and fourth quarter have not dropped at all.
Despite all the worries about trade wars, companies still seem comfortable with the earnings guidance they gave earlier in the year. "If they are comfortable with that, that is bullish for stocks," Raich told CNBC.
Still, you have to marvel at the strength of the market. Stocks have shrugged off almost everything. Just look at the rally on Monday. Stocks surged on the absence of any bad headlines about trade wars. Given that global trade has been the main sentiment mover in the last three months, and that the heated rhetoric has not really abated, just quieted down, you would think the markets would have a much more muted reaction.
This is obviously dangerous territory. The market has come to believe that cooler heads will prevail on global trade. Christine Short, who has watched this all unfold for Estimize, believes it makes sense. "Everyone knows global trade is good for earnings, and to get into a global trade war means that every country is going to shave a bit off GDP growth, and that many companies are going have to lower earnings growth, and no one wants that," she told CNBC.
It goes beyond trade, however: The market is pricing in a lot of good news.
1. The Fed: While global growth estimates are marginally lower, strong U.S. growth estimates are little changed, and the markets seem to believe they will stay that way. With inflation still relatively muted this has put the Fed is in a "dovish box" that will prevent it from aggressively raising interest rates.
2. Growth over Value: Traders believe that technology — the mother of all growth stories — will continue to put up outsized gains. With technology at a 25 percent weighting in the S&P 500, far and away the biggest sector, and again expected to grow earnings 25 percent in the second quarter, "You need tech to keep growing," Short said. She thinks tech will likely deliver, and not just FAANG names. Smaller companies in the enterprise space like Hubspot, Zendesk, Workday and Salesforce have also been doing well.
3. Shrugging off higher costs: The market will occasionally get into a mini-funk over higher commodity costs, or rising rates, or a higher dollar, but it has not yet translated into prolonged negative trading action.
What could derail this rosy scenario? For Nick Raich, it will all depend on corporate guidance: "If we see earnings estimates for the third and fourth quarter drop below 20 percent growth, that would be bearish in my mind," he told CNBC.