By Kostya Etus, CFA®, Chief Investment Officer, Dynamic Investment Management
Generally Positive Earnings Surprises
It’s hard to believe it’s been about six months since both the stock and bond markets bottomed out in early October. The rebound in the markets over the last six months has been supported by lower inflation, economic resilience and expectations for the Federal Reserve (Fed) to end their rate hike cycle.
Without significant economic data releases over the past couple weeks, investor focus has shifted to companies reporting their first quarter earnings results. Here are a few highlights, according to FactSet’s April 21 Earnings Insight:
- With 18% of S&P 500 companies having reported actual results, 76% beat earnings estimates and 63% surprised on revenues.
- Most Positive: Bank earnings have been better than feared, indicating that stress may be easing in the banking sector. Perhaps most notably, Phoenix-based regional bank Western Alliance Bancorporation posted favorable results, highlighting stabilization of deposits.
- Most Negative: The technology and communications sectors saw some weakness due to poor earnings reports from Tesla and AT&T, in terms of missing margin and revenue expectations, respectively.
Overall, we’re seeing continued resilience from companies, consumers, and the overall economy and markets.
Everything is Cyclical
There’s an adage in investing, “Buy the rumor, sell the news,” that feels like it’s representative of what we’re seeing in the markets recently. It refers to a trading strategy that buys stocks based on expectations of favorable surprises from corporate earnings reports, and then sells the stocks after the actual reports come out.
Let’s consider the current market environment. There was a lot of negative press in the first quarter related to economic weakness and potential for a recession, which led to weaker analyst estimates for company earnings. But good traders know that the lower estimates get, the higher the likelihood those estimates will be beaten — “Buy the rumor.” Then, as earnings started to come out this month with positive surprises, the traders sell their positions — “Sell the news.” This counterintuitive trading leads to higher volatility in the markets, which may persist until expectations are raised to get closer to reality.
It’s important to remember, that just like anything else related to investing, earnings are cyclical. Meaning over shorter time periods they may drop below average, and other times move above, but the overall trend is consistently positive. Take a look at the graph below, “S&P 500 Earnings Per Share,” dating back to 1927. A few key takeaways:
- Earnings are Cyclical: Notice how earnings dropped below the trendline during the pandemic in 2020, but then quickly rebounded through 2021. Next, they retreated again in 2022… a pattern is emerging.
- Trend is Upward: Despite the short-term ups and downs, looking all the way back to 1927, we see a nice upward trend of the long-term. In fact, growth rate over this almost 100-year period is more than 5% per year.
- Focus on Long-Term: It should come as no surprise that stock prices tend to follow similar patterns as earnings. After all, a stock price is representative of how much an investor is willing to pay for a share of earnings. Earnings have gone up for the last hundred years, and the next hundred should be no different — and you could expect stock prices to follow suit.
S&P 500 Earnings Per Share
(1927 – 2022)
As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.
Should you need help navigating client concerns, don’t hesitate to reach out to Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or email@example.com.
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This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.
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