The Stock Market's Reaction to Earnings Is All Wrong
None of the excuses to explain the malaise in equities amid strong profits hold water.
The bull market will return.
Photograph: Michael Nagle/Bloomberg
It has become shockingly common this earnings season for companies to report better-than-expected profits only to see their share prices fall. There are many explanations but none make much sense, nor do they acknowledge the bright outlook for equities.
First-quarter earnings on average were forecast to rise by an exceptionally high 17 percent, so it might seem reasonable for investors to be disappointed with anything short of perfection. However, earnings are coming in close to a gain of 22 percent, so that theory doesn’t hold water. One might then reasonably infer from the share price declines that future earnings projections are being revised lower. Although Caterpillar Inc. did suggest the first quarter might be the peak for its margins, results were sufficiently strong that analysts revised up their estimates for the balance of 2018 and even 2019. There goes another theory out the window.