How Investors Have Reacted to Q1 2019 Earnings Surprises05-07-2019 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 05/03/19. Rates and Economic Calendar Data from Bloomberg as of 05/03/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets produced mixed results for the week. In the U.S., the S&P 500 Index pressed ahead to a level of 2,940, representing a gain of 1.21%, while the Russell Midcap Index gained 1.07% for the week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, increased 1.67%. On the international equities front, developed markets moved 0.15% lower, while emerging markets followed suit and fell 1.30%. Finally, the 10-year U.S. Treasury yield finished the week at 2.51%.
Global equity markets had another strong week as nearly all major indexes finished up for the week. In the U.S., the S&P 500 Index inched higher to a level of 2,946, representing a gain of 0.22%, while the Russell Midcap Index gained 0.41% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 1.42% over the course of the week. On the international equities front, developed markets increased 0.33%, while emerging markets rose 0.48%. Finally, the 10-year U.S. Treasury yield finished the week at 2.54%.
As it currently stands, 76% of S&P 500 companies have reported Q1 2019 earnings, and a positive pattern first observed in the 4th quarter of 2018 is persisting. Positive earnings surprises have been rewarded, while negative earnings surprises have been punished. Historically, earnings have proven to be a key determinant of future stock price appreciation. Simple enough, right? Companies that produce quality products, control operational costs, and consistently produce positive earnings should stand a better chance of seeing their stock price appreciate.
Since 2006, on average, corporations that have produced earnings greater than analyst expectations have seen their stock appreciate by 1.02% more than the overall market, as measured by the S&P 500 Index, the first trading day after earnings are released according to data from Goldman Sachs Asset Management. Conversely, according to the same data report, companies that reported earnings below expectations have seen their stock depreciate by 2.11% more than the overall market. This sounds like common sense, but wasn’t actually the case throughout much of 2018.
Fortunately, common sense has taken the lead thus far in 2019, as firms reporting positive earnings surprises have appreciated by 1.34% more than the overall market, while firms reporting negative earnings surprises have depreciated by 4.85% more than the overall market – which is 2.3 times greater than the historical average. This trend, in our view, indicates that market participants are acting rationally; a sign that reinforces our conviction in the legitimacy of the continuation of this economic expansion at this point in time.
Building a portfolio comprised of well-run, profitable corporations, with strong balance sheets is paramount. As the economy continues to cool, investors will continue to reward financially sound and profitable corporations. As a result, we encourage investors to revisit whether they hold such companies within their overall portfolio strategies. If you would like to learn more about how we are helping clients invest dynamically and consistently with their own goals, time-frame and tolerance for risk, please do not hesitate to speak with your Hennion & Walsh Financial Adviser.
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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.