The financial media makes earnings season seem like a bloodbath…
First, it was the supply chain. Then it was inflation. Now, the news is harping on a possible recession.
When the economy shrinks two quarters in a row, it’s considered a recession. We know U.S. gross domestic product fell 1.5% in the first quarter of 2022… so folks are on high alert.
Now, the financial media is looking to confirm those recession fears.
We’re seeing plenty of headlines as companies like Target (TGT) and DocuSign (DOCU) miss earnings. Management teams talk about how supply chains and inflation are worse than expected.
Target management said it was sitting on way too much inventory and margins may fall to just 2% this quarter. DocuSign cut its second-quarter revenue target to $600 million… And shares fell roughly 25% overnight.
It’s stories like these that fan the flames of the recession narrative. But let’s look at the data to understand exactly how bad things are (or aren’t)…
When folks cherry-pick the worst results, it makes corporate earnings look much different than they are in reality.
Mind you, we’re battling significant supply-chain concerns. Inflation is running rampant. Demand is surging. And labor and materials are in short supply.
But when we take a look at all earnings, they’ve been much stronger than the financial media would lead you to believe.
Companies have been beating earnings at a healthy rate… the same above-average rate of an economy in an extended bull market.
An average of 72% of companies beat earnings estimates over the past decade. In the first quarter of 2022, that number was 77%.
That’s the eighth-best quarter in the past 10 years. Interestingly, most of the strongest quarters have happened since the start of the pandemic.
Last year, more than 80% of S&P 500 companies beat expectations. Frankly, last year’s recovery was stronger than folks predicted. But companies are still executing… despite what the headlines say.
Journalists have stirred up fear about retailers like Target, Lowe’s (LOW), and Home Depot (HD). But we have to keep this in perspective: Consumer discretionary performed worse in the first quarter than every other sector besides real estate.
Below, you can see why the media didn’t bother talking about industrials, for example… They beat estimates 87% of the time. Take a look at this breakdown by sector…
Industrials are benefiting from the capital-expenditure supercycle and their ability to raise costs to match inflation.
Information technology also had a successful quarter. In this sector, 85% of companies beat expectations.
It just goes to show that many of these companies’ fundamentals remain strong, despite the recent tech crunch.
Now, again, consumer discretionary is being hit the hardest. Headwinds like inflation and the shift to spending on services over goods are hammering the sector.
In the consumer-discretionary sector, 32% of companies missed estimates. Another 3% met expectations, and only 65% beat them. But it’s no coincidence that consumer-discretionary and real estate stocks performed the worst…
These are the stocks that soared after COVID-19 disrupted the economy. It’s clear that for many of these companies, those pandemic tailwinds are gone.
These results are proof that we’re not coming off a struggling quarter. Instead, the winners and losers have simply shifted from the pandemic norm.
If you take the time to delve into the data, you’ll find that the markets remain strong… And contrary to the headlines, if you know where to look, you can still find opportunities to come out on top.
Regards,
— Joel Litman
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Source: Daily Wealth