Earnings results are deteriorating as earnings season rolls on. Beat rates are less than the last two quarters but still remain above average.  Both revenue and EPS misses are being punished.  Individual stocks have been down 3.2% on average for a miss on earnings reporting days.  Those companies beating estimates have seen only a 1% rise in the price of their stocks.  Even some triple plays have seen a decline in their stock price.  Only 12.3% of companies have raised guidance.

Even though the above statistics sound dreary, it is important to point out that earnings reported so far are up 33% for the third quarter year-over-year.  The reaction to another solid earnings season may be disappointing, but the earnings gains are impressive and will help lower market valuations further.



Bearish investors are getting increasingly frustrated and crying “bubble” as stocks make all-time highs.  However, there are many reasons to stay optimistic during these historic times.  Here are just a few reasons why prices may have more room to run:

  • This is a young bull market. Since the March 23, 2000 bottom, stocks have appreciated about 105% over 585 days.  The average bull market since WWII lasted 1,709 days and advanced 158%.  We still think this bull market is early/mid-cycle.
  • Sector rotation is a necessary ingredient for a healthy bull market. The degree of sector rotation in the market this year has been impressive.  When one sector falters, others are ready to pick up the slack.  Through September, seven different sectors have taken the top spot in terms of performance rankings by month.  Technology, the largest sector in the S&P 500, has only ranked in the top position once this year (June).
  • What is the alternative to stocks? When it comes to choosing whether to allocate new money to stocks or bonds, it is still hard to find bonds attractive given historically low interest rates and deeply negative real interest rates (that factor in inflation).  Factoring in the CPI, the 10-year treasury is yielding about -4%.  The risk/reward trade-off between stocks and bonds leans heavily toward stocks with inflation and interest rates where they are.
  • The U.S. consumer is in good shape with almost $1.6 trillion in savings – and that doesn’t include stock market gains or home-price appreciation. Retail sales are up 16.7% YTD through September.  The U.S.’s recent slower economic growth is caused by supply problems, not demand issues (demand problems cause recessions).
  • Corporate earnings are up 33% yr/yr so far in the quarter currently being reported (cited earlier). As earnings rise rapidly, the P/E ratio on the market declines.  The forward P/E on the market is now under 20x, down from 23x a year ago.  Projected earnings growth for 2022 is 9.0%, a very respectable pace after such a large earnings gain this year (source:  FactSet).

In summary, we think we are only midway through a typical bull market cycle while enjoying a good economy despite supply chain disruptions and labor shortages. 

The bear argument can be summed up with a list of investors’ top concerns:  above-average valuations, inflation, rising interest rates, COVID, and fiscal drag.  How many of these issues are already priced into stock prices?  Hard to know, but these issues in aggregate are certainly providing a “wall of worry” for investors as they continue to add money to stocks.