Are you being paid for the risk you are taking?
This is a question consistently asked in the investing world. If the underlying companies in a portfolio are not growing earnings, a higher price and return on the investment generally isn’t justified. Facebook’s recent miss and price drop is a prime example. Investors do not “like” it when companies fail produce the results they said they would.
This example, however, was an outlier compared to the overall market, where we see a different story. During the recent earnings cycle, we’ve now seen the majority (453 out of 498 as of this writing) S&P 500 companies report earnings with a cheer.
There was a consistent theme in both sales and earnings growth across all sectors of the market. We’ve seen Earnings Per Share at 5.4% above analysts’ expectations and up 24% over the previous year. Expectations continue to be strong for the upcoming 3rd quarter with 20% EPS growth.
Specifically, only the Energy sector earnings and Telecom sales fell short in surprising for outsized growth. So far, all other sectors appear to be unaffected by headwinds around the world.
For some perspective, 65% of companies are beating expectations. Though a slowdown from previous quarters, this is a high percentage compared to the average over the past 19 years.
Overall, there is a great sense of near-term optimism with above average earnings comments of “better” and “stronger” times ahead. There are few concerns about tariffs and trade, though some companies are indicating it is just too early to tell what effect these might have on the market going forward. There is dead weight with any tariff situation, and I would echo it is still too early to tell what impact, real or behavioral, tariffs and trade will have on capital allocation within companies via buybacks and investors.
After all, companies are still raising guidance in the midst of these headlines. As we reach a close on earnings reports in the coming weeks, the market will indeed digest and reassess.