Report card day. As a kid, I dreaded report card day with a passion because I had no interest in my parents knowing how unproductive I was being in class. The earnings season is very similar to a report card. It is where the companies we invest in tell us how well they’ve been doing for the past three months.
Since this bull market started at the beginning of 2009, the S&P 500 index, which tracks the 500 largest companies on the stock exchange, has beat analysts’ earnings expectations 47 out of 48 quarters according to the Wall Street Journal. The one exception was Q2 2020 which was notably a strange time.
As companies begin reporting their earnings for the third quarter the question is will Q3 of 2021 become the 48 th quarter to beat analysts’ expectations? I think it might be tough.
The third quarter started strong but struggled late. The S&P 500 was positive 2.3% in July and 2.9% in August, but it went down – 4.8% in September. The late swoon gave a quarter that looked so strong a not very impressive 0.6% rate of return for the quarter. A big drop from the second quarter’s rate of return of 8.2% according to the Yahoo Finance.
Analysts at CFRA expect 8 out of the 11 sectors of the S&P 500 to have positive earnings, being led by industrials, materials, and real estate. The three sectors expected to miss the mark are consumer discretionary, consumer staples, and utilities.
Investors were pretty excited about 1Q and 2Q earnings season, but seem to be a little nervous about this one. The fear is that the slowing recovery might have started impacting earnings and growth in the companies they invest in.
I agree that the recovery is slowing and inflation and worker shortage are becoming worrisome, but I still see a lot of positives. The consumers and businesses seem confident we are getting back to somewhat normal, the economy is expanding, and earnings are growing even if not as fast as it was. Earnings growth is still earning growth.
Another positive is that the pandemic made our economy more digital-friendly and that will just make the economy stronger and more adaptable in the future. Virtual meetings have become a part of everyday life which I believe will make companies leaner and more profitable.
I “lost” a few report cards before my parents could see them when I was in school. Back then grades didn’t matter much to me, but they did later when I earned a doctorate. I eventually realized report cards gave you a chance to make adjustments if needed. Earnings reports are the same way. They give us an opportunity to take a deeper dive into how well our investments are doing. Hopefully, no spankings will be necessary, not that I know anything about that.
Have a blessed week!
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IAA and Steadfast Wealth Management are separate entities from LPL Financial.