Earnings – Reality vs. Perception

By Ben Norris, CFA, Securities Research Analyst, Associate Vice President

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After a rough start to 2022, stocks were able to find their footing last week with each of the major U.S. indices notching gains. The S&P 500 (SPX) gained 1.57% last week while the Dow Jones Industrial Average (DJIA) and Nasdaq Composite (COMP) were up 1.06% and 2.41%, respectively. These numbers don’t tell the whole story, however. Several notable stocks experienced wild reactions to earnings (both positive and negative) as investors decide that they’re either ready to load up for more gains or abandon ship. The impressive gain in COMP was partially thanks to a strong recovery in some of the Information Technology and Communication Services stocks that have seen mixed performance so far this year.

For the year, SPX, DJIA, and COMP are all still in negative territory with COMP as the worst performer, still down nearly 10%. Only two sectors are in positive territory so far this year, Energy and Financials, with both benefiting from very specific circumstances. The Energy sector is up a whopping 24.5% this year on higher crude oil (and natural gas) prices. Financials turned positive last week and are now up 2.7% on the year. Expectations for higher interest rates, strong financial markets, and a hot corporate transaction climate have boosted earnings and expectations for earnings going forward. The remaining sectors are negative but the outsized weight of the Information Technology sector, which is down nearly 9% in 2022, has weighed on markets in general despite last week’s positive performance.

Better-than-expected earnings could help extend last week’s recovery as we’re roughly halfway through this quarter’s reports. Three quarters of sectors have seen results come in ahead of expectations so far with just Utilities, Materials, and Industrials stocks disappointing relative to consensus numbers. On the other hand, Consumer Discretionary and Real Estate results have been much better than expected. Interestingly, from a style perspective, earnings of large-cap stocks have fared better than their small- and mid-cap counterparts and growth stocks have outpaced value while year-to-date performance has been the opposite. The S&P 500 Growth index is down 9.02% year-to-date while the S&P 500 value index is down just 1.52%. At the same time, the growth index’s earnings have been much stronger relative to expectations versus. the value index. Fundamentals and earnings tend to drive stocks over time, but in the short-term, things can get a little out of whack. Stock investors are forward-looking and more concerned with what will happen in coming quarters than they are with what happened over the last three months. Still, it seems that value stocks are finally getting their time to shine after a decade or more of underperformance versus growth.

In addition to earnings, investors received some good news in the form of exceptionally strong employment numbers. The U.S. labor market added 467,000 jobs in January, far exceeding the expected 150,000 additions (all while dealing with record Covid-19 infections). The unemployment rate ticked up from 3.9% to 4% in a sign that workers are coming back into the labor pool and looking for jobs. In response to these numbers, the yield on the 10-year U.S. Treasury rose to 1.9%, its highest level since late 2019. Investors see the strong employment figures as confirmation that the Federal Reserve is going to stick with plans to raise rates several times this year. Perhaps too optimistically, strong jobs numbers in the face of a Covid-19 surge may mean that we’re progressing down the path to normalcy, albeit slowly. Still, the January jobs report is affected more so than other monthly reports by revisions, so we’ll see if these numbers are echoed in future reports.

The highlight for the upcoming week (other than Super Bowl LVI) will be a readout on inflation in the form of the Consumer Price Index (CPI) on Thursday. This will be a closely watched CPI report as expectations are for the highest inflation readings in about 40 years. We’ll also get an update on consumer confidence and consumer inflation expectations on Friday.

Date Report Previous Consensus
Monday 2/7/2022 Consumer Credit

$40B

$24B

Tuesday 2/8/2022 NFIB Small-Business Index

98.9

97.5

Real Household Debt (y/y change)

1.8%

Wednesday 2/9/2022 Federal Reserve speakers
Wholesale Inventories

2.5%

2.0%

Thursday 2/10/2022 Initial Jobless Claims

238,000

230,000

Continuing Jobless Claims

1.63M

Consumer Price Index (CPI, y/y change)

7.0%

7.2%

Core CPI (y/y change)

5.5%

5.8%

Friday 2/11/2022 U. Michigan Consumer Sentiment Index

67.2

67.0

U. Michigan 5-year Inflation expectations

3.1%

 

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