Companies are positive, why aren’t stocks?Weekly market view from LMK Wealth management. Reprinted with permission.Visit www.lmkwealth.com
We just finished the busiest week of 1st quarter earnings season, and although many companies shared positive results, stock indexes experienced modest declines.1 The S&P 500 lost 0.01%, the Dow dropped 0.62%, and the NASDAQ gave back 0.37%.2 International stocks in the MSCI EAFE decreased by 0.39%.3
Last week provided a variety of information for investors to take in. On Friday, we received the initial reading of 1st-quarter Gross Domestic Product (GDP). The data came in more positive than analysts expected, with the economy experiencing 2.3% growth.4 The latest employment readings also showed costs for benefits and pay rising at the fastest pace in a decade.5 On the geopolitical front, the leaders of North and South Korea met for historic talks that could result in denuclearizing the Korean peninsula.6
As we continue to watch these developments, we want to explore what’s behind our current corporate earnings season.
A Deeper Analysis of Corporate Earnings
So far, this earnings season is the best on record.7 Of the S&P 500 companies with published data, 79.4% of them beat expectations.8The outperformance is significant, too. On average, companies are 7.95% higher than projected.9
Despite these positive results, stock prices did not rise in reaction. Companies that beat expectations have only experienced an average of a 0.3% equity increase in the first day after their report.10 The disconnect between high earnings and low stock increases may be surprising. But when you look closer, lingering questions about corporate health are weighing on many investors’ minds:
- Will higher costs – including wages and materials – decrease their profits moving forward?
- Could increasing treasury yields raise the cost of their debt?
- Will they continue to benefit from the new U.S. tax law, or is this earnings season an anomaly?11
No one can say for sure what is on the horizon for corporate performance. On one hand, concerns about growing costs and inflation could erode investor confidence and hamper the markets’ ability to regain previous highs.12 On the other, consumer sentiment remains high – and experts predict that each year until at least 2020, S&P 500 companies will have double-digit growth.13
Looking ahead, we will monitor many different details to gain more insight into what the future may hold, including bond yields, wage costs, and inflation. For now, please contact us anytime if you have questions about current market conditions or your plans for the future.
- Monday: Pending Home Sales Index
- Tuesday: PMI Manufacturing Index, ISM Mfg Index, Construction Spending
- Wednesday: ADP Employment Report
- Thursday: Jobless Claims, Factory Orders, PMI Services Index, ISM Non-Mfg Index
- Friday: Employment Situation