Investors are Reacting Differently to Earnings Surprises
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 02/08/19. Rates and Economic Calendar Data from Bloomberg as of 02/11/19. 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 were mixed on the week, as U.S. stock indices moved moderately higher and international equities retreated. In the U.S., the S&P 500 Index essentially finished the week essentially flat at a level of 2,708, representing a gain of 0.11%, while the Russell Midcap Index gained 0.69% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 0.32%. On the international equities front, developed markets fell 1.38%, while emerging markets lost 1.34%. Finally, the 10-year U.S. Treasury yield finished the week at 2.63%.
In past issues of this weekly commentary, we’ve written extensively about the upcoming slowdown in the growth rate of corporate earnings that is expected, while also stressing that a slowdown does not necessarily mean a recession. In other words, earnings that are growing at a slower pace are still very much growing. As it currently stands slightly fewer than 67% of S&P 500 companies have reported Q4 2018 earnings, and an undoubtedly positive pattern appears to be developing. 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 are more likely to see their stock price appreciate. Since 2006, on average, corporations that have produced earnings greater than analyst expectations have seen their stock appreciate by 1.01% more than the overall market on the first trading day after earnings are released according to data from Goldman Sachs. Conversely, according to the same data report from Goldman, companies that reported earnings below expectations have seen their stock depreciate by 2.11% more than the overall market. This obviously sounds like common sense, but wasn’t actually the case throughout a lot of 2018. In fact, at times throughout 2018, investors rewarded negative results while largely ignoring positive results. Fortunately, that trend has reversed course in a major way, as firms reporting positive earnings surprises have appreciated by 2.47% more than the overall market and 2.5 times higher than the historical average.
Building a portfolio comprised of well-run, profitable corporations, with strong balance sheets will be more important now than arguably at any point throughout this long recovery. 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. 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.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
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