Earnings Take a Backseat

In over thirty years in the investment business, it has been my view that earnings and company fundamentals are what matter most to successful equity investing. While that hasn’t changed, what can be discouraging for investors focused on fundamentals is that stock prices can disconnect from company fundamentals for long periods of time. We are in one of those times now where equity markets are not being driven by earnings or fundamentals but driven by:

  1. Inflation Data
  2. Inflation Data
  3. Inflation Data/Fed Policy

Inflation data was released this week and the data showed the producer price index and consumer price index coming in higher than expected. Equity markets initially suffered further declines on the heels of the data releases. Inflationary pressures remain stubborn, but investors may turn their focus in the coming weeks toward earnings. Corporate earnings started this past week with many large financial companies reporting on Friday. According to data from Factset, analysts forecast a 2.4% growth in third-quarter earnings for S&P 500 companies. Companies traditionally exceed the estimates, and we would not be surprised to see earnings come in around at a 5-7% increase from the prior year. The S&P 500 produced 8% growth in the second quarter, whereas analysts were expecting 6%.

S&P 500 year-over-year earnings growth

Companies will mention a broad number of issues impacting results; stronger dollar, higher wages, OPEC production cuts, and general uncertainty around the central bank policies across the globe. This certainly could dampen their forecast, as many big U.S. businesses have increased prices, but inflation is upsetting corporate margins. Yet, earnings are expected to continue to grow. Historically, equities were thought of as a good hedge in inflationary times because they could pass on price increases to consumer. Although, this time around it seems investors are more focused on the macro issues impacting stocks rather than company fundamentals.

When it comes to inflation data and the prospect for fed increases, we would not expect any meaningful change soon. With major U.S. equity markets down 25% or more in 2022, it may come as a surprise that earnings for the year are still expected to grow in the high single digits. But as JPMorgan Chase CEO Jamie Dimon said this week, the U.S. and global economy are facing a “very, very serious” set of headwinds that could result in a recession. Earnings are important but equities are clearly trading on inflation data.

Source: Factset, The Wall Street Journal

The opinions expressed are those of Harrison Financial Services as of OCtober 14, 2022 and are subject to change. There is no guarantee that any forecasts made will come to pass. This material does not constitute investment advice. Please remember that all investments carry some level of risk, including the potential loss of principal invested.