Earnings Step in to Assist with the Heavy Lifting - February 10, 2021
Interest rates remain low, and talk of another injection of government cash into the economy has added to the party-like mood on Wall Street.
But let’s not discount another important driver of stock prices—earnings.
Once again, analysts have failed to incorporate the expanding economy’s favorable impact on the bottom line of S&P 5002 companies.
With firms that have benefitted from economic distortions caused by the pandemic, analysts have woefully underestimated profits of many of these firms (Refinitiv).
When Q4 earnings season got underway, analysts estimated that S&P 500 profits would fall 9.8% versus one year ago (Refinitiv).
- With 63% of S&P 500 companies having reported through February 8, earnings are expected to rise 2.5%.
- Based on historical averages, that’s an enormous miss by the professionals vs the forecast as reporting began.
- While earnings were down in Q2 and Q3, they also exceeded very low expectations.
The possibility of volatility at today’s valuations can’t be dismissed.
Investors attempt to price in economic activity over the next six to twelve months.
What happens to the economy is a big part of the earnings equation for larger companies.