Weekly Market Insight - Earnings Rise, Stocks Stumble

VIDEO: Weekly Market Insight – Earnings Rise, Stocks Stumble

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We just finished the busiest week of 1^st quarter earnings season, and although many companies shared positive results, stock indexes experienced modest declines.[i] The S&P 500 lost 0.01%, the Dow dropped 0.62%, and the NASDAQ gave back 0.37%.[ii] International stocks in the MSCI EAFE decreased by 0.39%.[iii]

Last week provided a variety of information for investors to take in. On Friday, we received the initial reading of 1^st-quarter Gross Domestic Product (GDP). The data came in more positive than analysts expected, with the economy experiencing 2.3% growth.[iv] The latest employment readings also showed costs for benefits and pay rising at the fastest pace in a decade.[v] On the geopolitical front, the leaders of North and South Korea met for historic talks that could result in denuclearizing the Korean peninsula.[vi]

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.[vii] Of the S&P 500 companies with published data, 79.4% of them beat expectations.[viii] The outperformance is significant, too. On average, companies are 7.95% higher than projected.[ix]

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.[x] 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?[xi]

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.[xii] 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.[xiii]

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.

ECONOMIC CALENDAR

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

Click image above to enlarge

Notes: All index returns (except S&P 500) exclude reinvested dividends, and the 5-year and 10-year returns are annualized. The total returns for the S&P 500 assume reinvestment of dividends on the last day of the month. This may account for differences between the index returns published on Morningstar.com and the index returns published elsewhere. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

[i] https://www.reuters.com/article/us-usa-stocks-weekahead/rising-costs-inflation-on-radar-as-u-s-earnings-season-unfolds-idUSKBN1HY2Q8

[ii] http://performance.morningstar.com/Performance/index-c/performance-return.action?t=SPX&region=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=%21DJI&region=usa&culture=en-US

http://performance.morningstar.com/Performance/index-c/performance-return.action?t=@CCO

[iii] https://www.msci.com/end-of-day-data-search

[iv] http://wsj-us.econoday.com/byshoweventfull.asp?fid=485678&cust=wsj-us&year=2018&lid=0&prev=/byweek.asp#top

[v] https://www.marketwatch.com/story/worker-compensation-rising-at-fastest-pace-since-2008-eci-finds-2018-04-27

[vi] https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html

[vii] https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates

[viii] https://www.cnbc.com/2018/04/27/us-stock-futures-dow-data-earnings-and-politics-on-the-agenda.html

[ix] https://www.bloomberg.com/news/articles/2018-04-27/companies-are-beating-earnings-predictions-at-fastest-rate-ever

[x] https://www.bloomberg.com/news/articles/2018-04-27/fang-stocks-save-week-with-growth-angst-lurking-at-3-rates