W.With over eighty percent of the S&P companies reporting profits so far this season, I usually step back around this time and evaluate profits in general. How do the results stack up against expectations? Or against the previous year’s figures? What about revisions to the guidelines? Are they generally positive or negative? This is usually useful in establishing an overall strategy for stocks and a base case for future trading.
This year, the usefulness of this exercise is questionable as we found ourselves in such a unique situation in the first quarter of 2020. As you may recall, most of the economy closed around this time last year when the pandemic hit, and the data compared to that time and making meaningful conclusions is fraught with danger. Even so, you’d expect analysts to have this factored into their forecasts for EPS and revenue for the first quarter of 2021. Therefore, results relative to expectations are just as important as changes to guidelines, which by their nature wait for further recovery rather than a backward recovery if the numbers are biased.
Data so far is good on both fronts, suggesting that the stock market’s strength since the start of the year is fully justified. In fact, the numbers in terms of earnings and sales are extremely good.
According to FactSet’s latest release “Earnings Insights”With 88% of the S&P 500 companies reported, 86% exceeded expectations for earnings per share, with 76% exceeding sales. This positive surprise number for EPS is the biggest since FactSet started tracking these things back in 2008, and the earnings growth rate for the final quarter is 49.4%, the highest since the first quarter of 2010 when compared to an extreme quarter was carried out the previous year.
These are impressive numbers, even given the extraordinary nature of the quarter against which last year’s numbers are compared. However, investors should be careful if they are not too excited. It is tempting to look at this similarity to 2010, and to say that it was followed by one of the longest bull markets in history, a decade in which the S&P 500 is up around 300% from the first quarter of 2010. to overestimate the positive here.
The difference is that the index recovered less than half of its losses from the recession in the first quarter of 2010, this time around 25% above what it was before last year’s decline. With that in mind, it looks a little less impressive to beat 49.4%. Then there is the time of the ricochet. After the events of 2009, it took four years for stocks to return to pre-crisis levels. This time we did it in five months.
Obviously the circumstances are very different. It takes much longer to reverse the effects of a credit crunch-triggered recession than artificial, temporary constraints on the economy, but you can still feel the extent to which this market has priced in the good news. This is especially true when you consider that of the 71 companies that issued EPS guidelines so far this quarter, 29 have performed lower than expected and not higher.
The rapid rebound isn’t primarily because the shutdown was short-lived and reversible, nor is it primarily because the end of the pandemic is in sight once vaccinations are available. As last month’s employment figures showed, the recovery is still mixed. Some sectors point out that they may never fully replace all lost jobs, and there are serious signs of a combination of fear, suspicion, ignorance, and stupidity that lead to vaccine rejection. here and around the world.
No, the rapid upswing, as I have said so many times, is due to the fact that both monetary and fiscal economic reactions have been rapid and have continued. Again, the potential action by the Fed and the passage of the latest stimulus bill will have a far greater impact on the market than the performance of the companies whose stocks are traded. Because of this, you should be monitoring this week’s commodity prices and CPI data much more closely than earnings and, if you can bear it, keep an eye on the horse trade on Capitol Hill.
If you think this is skewed, or fundamentally irrelevant, or just plain wrong, I am inclined to agree. However, traders and investors should always act on what is, not what they think. And for the time being, beats artificially low comps and apparently very imprecise consensus estimates are still driving gains. As long as this remains the case and it is assumed that the core CPI did not show a massive jump on Wednesday and has scared traders about the Fed’s intentions, the current bull market is likely to continue.
The views and opinions expressed are those of the author and do not necessarily reflect those of Nasdaq, Inc.