February 15, 2018
After a week of market corrections and the most volatility in two years, it’s time for a little good news for the stock market. The good news is corporate earnings look terrific.
We are currently in the midst of earnings season where companies announce their earnings for the previous quarter and management provides guidance regarding the future direction of profits. According to Bespoke Investment Group, with over 1,000 companies reporting, over 70% have reported earnings over and above analyst estimates (see chart below).
Now, there is some truth to the fact that companies try to massage their earnings in order to outperform analyst estimates and look good to Wall Street, but what is significant about this quarter’s earnings is that analysts have been hiking their Q4 estimates at the fastest rate in a decade. We know it’s winter Olympics time, but let’s use a summer Olympics analogy. Picture an Olympic track star doing hurdles – the hurdles are being raised to higher heights, but the track star is still jumping over them with ease. That’s what’s happening with corporate earnings.
We’ve been of the mindset that the recent stock market correction is more technical than fundamental and strong corporate earnings support that conclusion. Also, rising earnings are good for valuations. Stocks are commonly valued on the basis of their Price/Earnings (P/E) ratio. With the denominator of that ratio, earnings, going up, stocks can continue to get cheaper without any further declines in price. Strong corporate earnings are good news indeed.
Have a great week!