Monday 26 August 2019

Earnings are driving stocks, not just the Fed and Trump

Interest rate cut: Jerome Powell, chairman of US Federal Reserve. Photo: Reuters
Interest rate cut: Jerome Powell, chairman of US Federal Reserve. Photo: Reuters

Lu Wang and Vildana Hajric

Last week, when a few words from Jerome Powell and Donald Trump were enough to send stocks reeling, it's easy to conclude their pronouncements are all that matter to markets right now. But something else keeps showing it can sway prices: bad earnings.

While investors focused on the US central bank and president, the reporting season showed fundamentals still matter, particularly in a market as richly valued as this one. Falling short of earnings forecasts has swift consequences.

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Among S&P 500 companies that have reported second-quarter results, those whose earnings fell short of analyst estimates saw their stock lag behind the market by three percentage points the day after, data compiled by Goldman Sachs showed.

Meanwhile, beats were rewarded by gains of 1.43 percentage points. That spread - more than four points - was the third biggest since 2012.

The divergence in performance shows that even in an environment where macro concerns dominate, getting stock selection right still has consequences.

Earnings haven't lost their ability to move markets - something else to worry about as companies slash forecasts at the fastest rate in four years.

"Investors are worried, they're anxious, they're looking for reasons to sell," said Chris Gaffney, president of world markets at TIAA Bank. "Earnings expectations have been lowered. When you miss those lowered expectations, you're going to get punished."

The S&P 500 tumbled after Fed chairman Powell called the interest rate cut a "mid-cycle adjustment", denting hopes of a full-blown easing cycle.

It fell again after President Trump said that he will impose new tariffs on China.

Yet the S&P 500 remains 17pc higher this year despite no profit growth, while valuations have expanded at the fastest pace in a decade. At 16.7 times forecast earnings, the index trades at an 11pc premium to its 10-year average. Some optimism is linked to Bloomberg data suggesting firms will grow by almost 6pc in the fourth quarter and 10pc in 2020.


Irish Independent

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