It’s been a painful time for investors, hoping that earnings could push stocks up. There is also belly-churning in rallies.
Michael Nagle/Businesshala
Stop me if you’ve heard it before: Company beats profit and sales estimates, stock falls. It’s all become very typical for many stocks in January as companies report fourth-quarter results — and that doesn’t seem set to change this earnings season. no fear. Not all is lost for the stock in 2022.
It’s been a tough, painful time for investors hoping the earnings could propel shares higher. There is also belly-churning in rallies. The S&P 500 rose 0.8% last week after a late Friday rally that sent the index up 3.2% from its daily low. The Dow Jones Industrial Average rose 1.3% for the week and the Nasdaq Composite was flat.
The Federal Reserve got a lot of blame, but earnings didn’t help. Last Tuesday, General Electric (ticker: GE) reported a better-than-expected fourth quarter, but dropped 6% in response. The next day, Tesla (TSLA) also reported better-than-expected results, and its shares fell 12%. (More on Tesla here.)
Extensive data paints the same picture. As of Friday, about 170 companies in the S&P 500 had reported quarterly numbers. Some 77% have surpassed analyst earnings estimates, while 68% have topped sales forecasts. It hasn’t been good enough. So far this earnings season, the average stock price is down 1.2% in response to earnings. In the third quarter, the average response to earnings was 0.1%.
The number of companies that beat Wall Street estimates isn’t the problem. Brian Rauscher, Fundstrat’s head of global portfolio strategy, describes fourth-quarter performance data as normal. The problem, he explains, is the magnitude of the “beat” earnings.
So far, fourth quarter earnings have come in better than expected by about 5 per cent. Not bad, but S&P companies’ earnings were about 9% better than expected in the third quarter of 2021, about 17% better in the second quarter, and about 21% better than last year’s first quarter. The trend is down.
The magnitude of the earnings beat is, of course, more important to traders than investors. Earnings growth, however, shows a similar pattern. So far for the fourth quarter, earnings have increased nearly 30% year over year, down from 39% during the third quarter and up 50% during the first quarter. A ridiculous 100% increase in second quarter 2021 earnings. What’s more, for the first quarter of 2022, earnings for S&P 500 companies are expected to grow by an average of only 6%.
Earnings estimates are also falling due to weaker-than-expected guidance. It also puts pressure on incoming earnings growth. GE’s first-quarter earnings forecast fell from 57 cents per share to 43 cents per share, after the company called guidance “noise” by RBC analyst Dean Dre. First-quarter earnings estimates for the entire S&P 500 are down about 1% over the past few days, as earnings reports come in. Fall in earnings growth is a major problem for the stock market. In fact, it’s probably an even bigger problem than inflation.
Of course, inflation could be the reason for the decline in income growth and a hazy outlook for 2022. Still, Rauscher isn’t worried about a full-year inflation derailment for the stock. He is in the fleeting inflation camp. “I’m not reading the jolts data by the way [Fed Chairman] Powell communicated it,” he says.
Shock Abbreviation for “Job Openings and Labor Turnover Survey” of the Bureau of Labor Statistics. It has become a popular report as the number skyrocketed in November, up 57% year over year, indicating that the labor market is tight. The higher shock is something the Fed has cited as a reason for raising interest rates to combat inflation. Rauscher, however, points out that Covid turns everything upside down. Vaccine mandates, along with related firings for not being vaccinated and Omicron’s related absenteeism, all combine to skew Jolts data.
Things could get better from here. For companies, this means lower costs related to turnover and training. Lower costs will eventually translate into better income growth. However, things won’t get better immediately, which is why Rauscher expects a jump in the first quarter for shares. “If someone is over-aggressive … and has the ability to do some hedging or something tactical” [trading]’Go for it,’ he added.
But it is a risky strategy. For less aggressive investors, he suggests making a list of their favorite highest-quality stocks and thinking about a price they would have to hit to add them to the portfolio.
That way, you can at least feel some benefit from all this pain.
Write Al Root atlen.root@dowjones.com
