Market Commentaries

  • Investors are Reacting Differently to Earnings Surprises


    Market Overview


    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.

    Happening Now                   

    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.

    Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

    There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.

    The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

    Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

    Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

    Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.


    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.

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