{"id":8100,"date":"2021-06-07T13:03:09","date_gmt":"2021-06-07T17:03:09","guid":{"rendered":"https:\/\/www.zacksim.com\/?p=8100"},"modified":"2022-02-27T17:54:32","modified_gmt":"2022-02-27T17:54:32","slug":"investors-shift-focus-instead-wall-worry","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/investors-shift-focus-instead-wall-worry\/","title":{"rendered":"Corporate Earnings Should be the Key Investor Focus"},"content":{"rendered":"

The U.S. economy is growing, vaccination rates are slowing but remain elevated, and restrictions are falling away quickly. Pandemic risks are falling, and corporations are posting very strong earnings numbers.1<\/sup><\/p>\n

Yet, even still, we keep hearing about inflation concerns, labor market shortages, supply chain bottlenecks, too much government spending, and frothy asset classes. Don\u2019t get me wrong \u2013 every one of those economic fundamentals matters greatly. But I also think it\u2019s true that corporate earnings matter more<\/em>, and no one seems to want to talk about it. Instead, the \u201cwall of worry\u201d continues to dominate the headlines, and I think that\u2019s good news for stocks.<\/p>\n

As I write, 477 S&P 500 have reported Q1 2021 earnings, and the results were arguably historic. 86% of reporting companies beat earnings-per-share estimates and 77.4% beat revenue estimates. These are big numbers.<\/p>\n

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Earnings for reporting companies were up +48.4% from the same period last year, on +10.1% higher revenues. Of course, these figures come with an asterisk \u2013 the same period last year included March 2020, when the pandemic ravaged the economy. Looking ahead to Q2 2021 earnings, we could see an even bigger year-over-year jump, given the effect of the global economic shutdown in Q2 2020.<\/p>\n

Investors should keep in mind, though, that strong earnings in Q1 2021 and the even stronger growth expected in Q2 are also reflective of strong growth in an absolute sense, not just because of low 2020 comparisons. The chart below demonstrates how total quarterly earnings in Q1 2021 far surpassed anything we\u2019ve seen previously, with Q2 2021 (estimated) expected to be +7.3% higher than Q2 2019 (a fairer comparison).<\/p>\n

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Another key bullish factor in the earnings arena is earnings estimates, which play an important role in our stock selection process. We look for strong earnings performance in general, but we also look for companies that consistently push earnings estimates higher and <\/em>beat their estimates a high percentage of the time. Long-term, owning the earnings generators usually bodes well for total return.<\/p>\n

In the chart below, you can see how Q2 2021 earnings growth estimates have pushed higher over the last several months, which is a strong signal that CEOs are thinking optimistically about how the economy \u2013 and their businesses \u2013 are likely to perform in the months and the year ahead (chart below).<\/p>\n

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The bottom line is that the preponderance of positive surprises this earnings season \u2013 coupled with corporations raising estimates nearly across the board \u2013 is reflecting a genuine improvement in underlying economic fundamentals. But it also speaks to how corporations are effectively managing their businesses in the current environment and executing their company\u2019s strategic and operating plans.\u00a0There are always plenty of factors to worry about, like inflation and dislocations in the labor market. But from a pure investment standpoint, it is difficult to argue against business being good.<\/p>\n

Bottom Line for Investors<\/strong>\u00a0<\/strong><\/p>\n

The corporate earnings picture is strong, and the economy is growing at a solid clip. Yet, even still, many want to keep the focus on what\u2019s wrong or \u2018will be wrong\u2019 <\/em>with the economy: inflationary pressures, rising interest rates, frothy asset classes, and bubbles.<\/p>\n

Again, I am not saying any of those factors do not matter \u2013 they all do. But it\u2019s also important to remember the factor that matters most to stock prices \u2013 corporate earnings, in my view \u2013 are in a solid place and likely to get stronger. As the wall of worry continues to grow, just remember that corporate earnings are growing too.<\/p>\n","protected":false},"excerpt":{"rendered":"

The U.S. economy is growing, vaccination rates are slowing but remain elevated, and restrictions are falling away quickly. Pandemic risks […]<\/p>\n","protected":false},"author":3,"featured_media":7908,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-8100","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8100","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=8100"}],"version-history":[{"count":1,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8100\/revisions"}],"predecessor-version":[{"id":8642,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/8100\/revisions\/8642"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=8100"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=8100"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=8100"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}