Investment Insights: Counting the earnings chickens
This weekly report presents insights from our Global Investment Management team.
After companies prepared markets for lower profits via reduced guidance and Wall Street analysts’ forecasts, the first quarter earnings season is turning out to be a welcome surprise.
The S&P 500 extended its advance and hit a new all-time high of 2,933 yesterday after some better-than-expected earnings announcements and a continued climb in crude oil prices.
Investors continue to anxiously await a resolution to the trade dispute between the U.S. and China, which has seen notable progress according to recent statements from officials.
So far, 132 companies within the S&P 500 have reported earnings and investors are grinning ear to ear. The slew of lower guidance from companies last year and lower expectations from analysts may have been overblown as corporations are beating estimates at record rates. According to data aggregated by Bloomberg, almost 80% of the companies that have reported so far are beating their estimates, which is bit higher than last season’s roughly 70%. The amount they are beating estimates by is also right around average over the past several quarters at 4.03%. The biggest surprise of all may actually be on the growth side.
Analysts had widely expected negative growth numbers in earnings after a spectacular 2018, but the same Bloomberg data is showing earnings actually grew 2.37%. According to FactSet’s most recent data, this positive growth combined with the forecasts for the remaining companies should result in -3.9% earnings growth. The majority of S&P companies have yet to report, with companies like Microsoft, Facebook, Caterpillar, Amazon, Starbucks, and Exxon Mobil, announcing their results this week – it’s still too early to tell.
U.S. Secretary of State Mike Pompeo announced yesterday that the U.S. won’t renew waivers for countries purchasing oil from Iran. The U.S. administration looks to be ramping up enforcement of their sanctions against the country again by letting waivers provided to select countries expire. The waivers were provided to eight separate countries including China, India, and Japan and will expire on May 2, which would greatly reduce Iran’s exports. Saudi Arabia, the de facto leader of OPEC, also announced that it will hold off on significant supply shifts for the time being. Oil prices rose on the news and were trading over $66 a barrel yesterday for WTI crude. The commodity has rallied over 45% in 2019.
As stock markets reach or exceed record levels, we have taken the opportunity to capture some of those gains by executing trades in our strategies to reduce exposures to U.S. small cap and emerging market stocks and reinvest capital into shorter maturity Treasuries. We believe this change not only locks in profits for our clients, but also decreases overall risk in our strategies. While earnings seem to be driving the current upward leg in stock prices, and we are hoping for a continuation of the positive trend, the next few weeks will be chock-full of key results – don’t count your chickens before they hatch.
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