The “most important variable” for a rally that sticks

Why did the market’s “momo” seem to suddenly evaporate in February? What caused it? Angst over AI profitability? The never-ending story of President Trump’s tariff announcements? Concern over the collapse of the transatlantic alliance? Stubborn inflation?

In markets, as with improv comedy, the answer must be, “Yes, and.”

But more importantly, how will we know if stocks are ready to get out of this ditch? After all, on Friday, the S&P 500 enjoyed its biggest jump of the year, with a 2.1% increase. With Monday’s 0.64% increase, the blue-chip index has had its best two-day gain, 2.8%, since Trump triumphed last November. Is this rally for real?

Morgan Stanley stock watcher Mike Wilson was out with a note over the weekend giving his two cents on whether the upturn could mark an end to the whipsaw trading that bedeviled traders over the last month: “The short answer is, probably not,” he wrote. He continued:

“In my view, it will take more than just an oversold market to get more than a tradable rally. We firmly believe that earnings revisions is the most important variable, and while we could see some seasonal strength/stabilization in revisions, we believe it will take a few quarters for this factor to resume a positive uptrend.”

As you can see from the chart above, the drop in S&P 500 earnings per share estimates for 2025 has stabilized in recent weeks. An important driver of that decline in expectations, simply because of their massive market capitalizations, has been a drop in profit expectations for a few giant tech firms including Apple, Microsoft, and Tesla.

Signs of stabilization in earnings expectations for these companies is key for getting overall revisions to start to turn up, supporting an ongoing rally. But so far, only Microsoft has shown signs of life after reporting its results in late January.