The Dow Jones Industrial Average posted its worst day so far in 2022 as the benchmark closed the week down -1.90%. The S&P 500 and Nasdaq posted similar losses perplexing investors. The conundrum comes as most companies continue to report strong earnings.
Over 80% of S&P 500 companies have reported 4th quarter 2021 earnings. Of those companies, 77% have reported earnings above the mean estimate. On average, earnings have beaten estimates by 8.5%. So why is the S&P 500 down almost 9% so far this year?
There is no way to know for sure how a stock will react to its earnings release; even if they beat expectations, negative forward guidance could cause a drop in share price. Alternatively, companies that fall short of expectations could see share price appreciation from investors that are looking to capitalize on future growth. In the end, there are so many different aspects to a company’s earnings release that makes it difficult to discern exactly what is causing movement in a company’s stock price.
With that in mind, it does seem that companies that are missing their earnings estimates are being punished severely (Meta/Facebook) and those that are beating estimates are being rewarded less than they usually are. The chart below from FactSet shows how stock prices have fared so far this year. The blue bars are earnings reports for the 4th quarter of 2021 and the gray bars are for the five-year average. You can see the five-year average (gray bar) is much greater on the left meaning those companies beating estimates are not being rewarded as they historically would be. However, the blue bar on the right showing those companies missing analyst estimates is dropping more than their five-year average (gray bar).
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When you throw in all the concerns I mentioned in last week’s market commentary, you can see why the market is having trouble finding solid footing. This means investors may see the stock market as “fairly valued.”
Even though investors may be worried about future growth, with earnings as strong as they have been, I remain bullish on the stock market. If you have any questions, please contact me.
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The Markets and Economy
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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
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