Although it is still early in the first quarter earnings reporting season, “so far so very good,” according to a recent article by Charles Schwab Senior Vice President and Chief Investment Strategist Liz Ann Sonders.

Here are some takeaways from her comments:

• The year-over-year “blended” earnings growth estimate has risen to nearly 31% compared to an estimate of 25%. “If it remains at that level,” writes Sonders, “it would be the highest quarterly growth rate since the fourth quarter of 2010.”
• “In general, there has been an upward trend in the percentage of upward revisions vs. downward revisions,” writes Sonders, “with the latest ratio at two-thirds up and one-third down.”
• Regarding valuations, Sonders notes that last year saw a surge in multiples “thanks to the strength in stock prices alongside the plunge in earnings.” She adds that although the pandemic-related drop in earnings was “epic relative to history, what is in keeping with history is the tendency for multiples to rise in the first year of recovery as stocks price in the coming improvement to earnings.”
• Sonders warns investors, however, not to use P/E as a market timing tool.
• “Any acceleration in Treasury yields could put renewed pressure on higher-multiple segments of the stock market.”
• Earnings growth could peak in the second quarter (along with annualized quarter-over-quarter real GDP growth).
• Lofty valuations along with inflated investor sentiment suggest “risk is high for a pullback or correction, and spikes in volatility,” Sonders writes, stipulating that currently, market breadth looks healthy— “which has historically been a positive offset to stretched valuations/sentiment.”
• Today’s market appears to be rewarding strong fundamentals, after a period “dominated by lower-quality factors earlier this year,” according to Sonders, who adds that the shift makes the market “easier to navigate than a speculative low-quality, factors-driven market.”
• Still, she warns, “discipline around risk mitigation is essential; including diversification across and within asset classes, and periodic rebalancing.”