The stock market just avoided an 'earnings apocalypse,' paving the way for a year-end rally

• The stock market has avoided an "earnings apocalypse" following third-quarter results, according to BMO.
• BMO's Brian Belski highlighted three factors that should help stocks climb the "wall of worry" into year-end.
• "We continue to view this as a bull market and that the path of least resistance is higher stock prices," Belski said.

The stock market just avoided an "earnings apocalypse" following third-quarter results, and that should set the stage for more gains heading into year-end.

That's according to BMO chief investment strategist Brian Belski, who said in a recent note that despite the ongoing rally in stocks, there's still a lot of pessimism among investors.

"Despite an impressive month-to-date gain thus far, there is still a fair amount of negativity and concern regarding stock market direction," Belski said. 

But that negativity among investors should serve as fuel for the market as stocks are poised to "climb the wall of worry" heading into the end of the year.

"We continue to view this as a bull market and that the path of least resistance is higher stock prices through year-end," Belski said. "The extremely strong start to 2023 provided a buffer for recent weakness and starts that strong have typically led to continued gains even with bumps along the way."

Belski highlighted that the resilience of corporate earnings is getting overlooked by investors, especially given that many thought earnings estimates were too high this year.

But corporations are starting to deliver on profits after a short-lived earnings recession.

With 94% of S&P 500 companies having reported third-quarter earnings results, 83% beat profit estimates by a median of 7%, which is higher than average. Meanwhile, third-quarter earnings per share for the S&P 500 are on track to grow 11% excluding the energy sector, according to Fundstrat.

"Earnings apocalypse has not occurred. Despite all the concern about 'too high' earnings estimates this year, aggregate earnings surprise has been well above average for the first three quarters. Percentage of companies beating also near historical highs, while guidance trends remain buoyant," Belski said.

The solid earnings is setting the stock market up well for continued gains over the next few months, according to the note, especially thanks to a seasonal tailwind during the last two months of the year, and a marked improvement in stock market breadth.

"The number of outperforming S&P 500 stocks has increased to 193 from 146, or nearly 10% of index stocks, when comparing [the] second half of 2023 vs first half of 2023, respectively," Belski noted.

That's an encouraging signal, as more participation in the stock market rally should help drive a sustainable continuation of the current bull market.