We just finished the busiest week of first quarter earnings season, and, although many companies shared positive results, stock indexes experienced modest declines. The S&P 500 lost 0.01%; the Dow dropped 0.62%; and the NASDAQ gave back 0.37%. International stocks in the MSCI EAFE decreased by 0.39%.
Last week provided a variety of information for investors to take in. On Friday, we received the initial reading of first-quarter Gross Domestic Product (GDP). The data came in more positive than analysts expected, with the economy experiencing 2.3% growth. The latest employment readings also showed costs for benefits and pay rising at the fastest pace in a decade. On the geopolitical front, the leaders of North and South Korea met for historic talks that could result in denuclearizing the Korean peninsula.
As we continue to watch these developments, we want to explore what's behind our current corporate earnings season.
A Deeper Analysis of Corporate Earnings
So far, this earnings season is the best on record. Of the S&P 500 companies with published data, 79.4% of them beat expectations. The outperformance is significant, too. On average, companies are 7.95% higher than projected.
Despite these positive results, stock prices did not rise in reaction. Companies that beat expectations have only experienced an average of a 0.3% equity increase in the first day after their report. The disconnect between high earnings and low stock increases may be surprising, but, when you look closer, lingering questions about corporate health are weighing on many investors' minds:
- Will higher costs, including wages and materials, decrease their profits moving forward?
- Could increasing treasury yields raise the cost of their debt?
- Will they continue to benefit from the new U.S. tax law or is this earnings season an anomaly?
No one can say for sure what is on the horizon for corporate performance. On one hand, concerns about growing costs and inflation could erode investor confidence and hamper the markets' ability to regain previous highs. On the other, consumer sentiment remains high, and experts predict that each year until at least 2020, S&P 500 companies will have double-digit growth.
Looking ahead, we will monitor many different details to gain more insight into what the future may hold, including bond yields, wage costs, and inflation. For now, please contact us anytime if you have questions about current market conditions or your plans for the future.
- Monday: Pending Home Sales Index
- Tuesday: PMI Manufacturing Index, ISM Mfg Index, Construction Spending
- Wednesday: ADP Employment Report
- Thursday: Jobless Claims, Factory Orders, PMI Services Index, ISM Non-Mfg Index
- Friday: Employment Situation
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International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
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The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indices from Europe, Australia, and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Gross Domestic Product (GDP) is a measure of output from U.S. factories and related consumption in the U.S. It does not include products made by U.S. companies in foreign markets.
Inflation is the rise in the prices of goods and services, as happens when spending increases relative to the supply of goods on the market.
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