Tuesday, October 06, 2020

Earnings Support Market's Recent Move Higher

The one thing investor know about company earnings reports is it is a rearview mirror look on what has occurred on a quarterly or annual basis. This backward view may add little insight into what expectations might unfold in the future. Over the long run though, stocks do tend to follow earnings and or cash flow. Having noted this, the S&P 500 index bottomed in March while earnings bottomed in the second quarter, thus, the market seemingly anticipated an improved earnings environment. Subsequent to the market's March bottom, the S&P 500 Index has moved higher on a nearly uninterrupted path as seen in the below chart.

One reason for the market's improved performance can be attributed  to the positive quarterly earnings growth outlook for the the third and fourth quarter of this year and the positive year over year earnings growth expectations looking 12-months forward. The above chart shows I/B/E/S expected 12-month forward earnings growth to come at over a 13% growth rate. The S&P 500 Index earnings growth expectations for calendar year 2021 versus 2020 is estimated to equal almost 28%, i.e., $166.22 versus $130.22, respectively. The below table shows quarterly and annual earnings figures for the S&P 500 Index, and yes, 2022 seems pretty far in the future, but current expectations have earnings in 2022 at $190.82 for the market or up almost 15% versus 2021.

In summary, the market's improved performance since March, and possibly into 2021, is partially supported by an improved earnings picture for companies. Rarely does the market move higher in a straight line, and with a fast approaching election day on the horizon, some market volatility would not be a surprise.

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