Stocks Need Some Wind in Their Sails

Stocks Need Some Wind in Their Sails

Stock market analysts are always saying “at the end of the day, the only thing that matters is earnings”, but it is NOT the only thing that matters

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According to FactSet.com, for Q2 2018 with 81% of the companies in the S&P 500 reporting actual results for the quarter, the blended earnings growth rate for the S&P 500 is 24.0%. If 24.0% is the final growth rate for the quarter, it will mark the second highest earnings growth since Q3 2010 (34.1%). The highest since that date was Q1 of 2018. 80% of those companies have reported a positive EPS surprise and 74% have reported a positive sales surprise. If 80% is the final number, it will mark the highest percentage of positive EPS surprises since FactSet began tracking this metric in Q3 2008. The only real negative so far is guidance, which has been issued by 48 of these companies as of Friday, with only 17 issuing positive guidance. The NASDAQ is +13.5%, the S&P is +5.9%, and the Dow is +2.9%.  While the NASDAQ gain is impressive, it’s interesting to note that almost half of that gain (8%) came in January before either of those impressive blended earnings growth rates were known. The S&P only turned back positive for the year in May and the Dow in June. One might say, “well, this is peak earnings, so the markets will turn on lower future estimates”, but according to research done by Sam Stovall, chief investment strategist at CFRA, the market does not necessarily fall after peak earnings. Stovall looked at historical 12-month rolling earnings data and found that “in more than 70% of observations since WWII, the S&P 500 rose in price nine months after a peak in 12-month GAAP EPS growth” as taken from an article by Anora M. Gaudiano at Marketwatch.com. 

It’s not just earnings

There is no better evidence dispute the “earnings aren’t everything, they are the only thing” theory then right now. The trade war between the U.S. and everyone generally is not a good sign for the strength of future earnings, which is arguably more important than past earnings for the pricing of the stock market. More specifically, rhetoric between President Trump and China over the weekend and this morning shows a “digging in” by both combatants on that front of the trade wars. Lastly, Jamie Dimon, JPMorgan Chase & Co. chief executive officer said Saturday people should be prepared to deal with a 10-year bond yield at 5 percent or higher, which won’t change earnings in the future that much, but if correct, will give investor’ money a viable alternative to  the Nasdaq, and especially the S&P and the Dow. So while earnings matter the most, alone good earnings are not enough to drive stocks higher. A little wind at your back never hurts. 

 

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