Stocks are back at all-time highs while the economy is quickly improving, now comes first-quarter earnings season. This week on the LPL Market Signals podcast, Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss why another very solid earnings season is on the horizon. With stocks up more than 80% from the lows last year, the bar is definitely set quite high, but corporate America will likely come through again.
Let’s talk earnings. The last two earnings seasons have come in much better than expected, and this earnings season may be no different as corporate America is poised for big earnings gains in the first quarter of 2021. Given strong economic growth, vaccine distributions, fiscal stimulus, and recent positive trends in company guidance, analysts’ estimates are signaling upside to expectations. Ryan and Jeff explain why first quarter could see a 30% year-over-year increase in S&P 500 earnings per share, the best in over a decade.
Are things too good? With a 37-year high in manufacturing and an all-time high in services data, are things actually too good? Don’t forget, a year ago things were very bad on the economy, yet it was a great buying opportunity for investors. The truth is the bar is set quite high, as high optimism has nearly everyone expecting a stronger economy the second half of the year. Historically, when the ISM manufacturing survey is over 60 (like it is now), 3- and 6-month S&P 500 Index returns have actually been negative. Also, manufacturing tends to peak about a year after a recession ends, likely suggesting economic data going forward could begin to slow.
The Bull is still here. Ryan and Jeff list multiple stats that suggest the bull market could have plenty of time left. One signal they examine is what happens after a solid first quarter. A solid first quarter for the S&P 500 Index could signal continued strength, as historically a gain between 5-10% in the first quarter has led to continued strength the rest of the year 87% percent of the time. Chief Market Strategist Ryan Detrick has called this the sweet spot, as larger gains tend to lead to more muted returns, while weak returns open the door for weak returns the rest of the year.
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