Weekly Brief: Investors Are Only About To Get Harder To Impress

Weekly Brief: Investors Are Only About To Get Harder To Impress

over 2 years ago3 mins

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The US’s third-quarter earnings season has been better than expected, but there are already signs that investors will be seriously hard to impress next time around.

🕰 Recap

  • Oil giant Chevron announced stronger-than-expected third-quarter earnings last month
  • Healthcare giants Pfizer and CVS followed up with strong results of their own last week
  • And chipmaker Qualcomm brought up the rear with an update that beat expectations

✍️ Connecting The Dots

More than half of all S&P 500 companies have reported their latest quarterly updates, which makes now a good time to take stock of how they’ve been getting on. Over 80% have reported quarterly profits ahead of analysts’ estimates, overshooting the five-year average of 76% and marking the fourth-highest proportion of companies to beat expectations since 2008. Those profits have come in an average of 10% higher than forecasts – again, above the five-year average of 8.4%.

The above-average figures are largely down to a combination of two things: companies coming out swinging from last year’s turmoil, and the benefit of comparison against 2020. And given that firms in the financials, healthcare, communication services, technology, and energy sectors have been among the biggest beneficiaries of the post-pandemic recovery, they’ve been the biggest contributors to the overall increase in third-quarter earnings.

But there are warning signs, with analysts only increasing their profit forecasts for this quarter by 0.9%. That’s the sixth quarter in a row where forecasts have initially increased, sure, but it’s the smallest increase yet. That’s worrying: if optimism around future earnings growth is waning, it probably won’t be long until earnings growth itself disappoints.

🥡 Takeaways

1. The recovery’s running out of steam.

With earnings forecast hikes shrinking and economic growth expectations moderating, the recovery seems to be moving from its easy, high-growth phase into a more challenging one. What’s more, growth rates will look even slower given that 2021’s high earnings growth will create a high basis of comparison for next year. Analysts, then, may revert to type by next year, initially cutting future forecasts on average after earnings season.

2. Underpromising and overdelivering will be key – again.

The S&P 500’s record high last week also suggests investors’ behavior might be shifting back to pre-pandemic levels. That might take the wind out of your sails if you’re looking for big gains in the stock market: it’s true that valuations (as measured by price-to-earnings ratios) don’t look as high as they’ve been in the past, but investors’ bar for company performances is. That means firms increasingly need to beat earnings estimates and raise their profit forecasts to have any shot that their shares will outperform. We’re already seeing that play out: 85% of US tech stocks that have beaten analysts’ profit forecasts this earnings season have dropped by an average of 2.4% the day after their updates.

🎯 Also On Our Radar

Data out last week showed that average UK house prices rose almost 1% in October to a record $365,000. That’s no doubt because of the shortage of homes in the country, as well as a pretty strong labor market that’s driving demand. Still, the rate of property price growth is likely to slow in the next few months: the Bank of England is on the cusp of increasing interest rates, which would make new mortgages more expensive.

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