We focus less on Wall Street analysts’ earnings estimates and more on what corporate leaders actually say about their current business and future expectations. Chief Investment Officer Jim Lowell and Equity Research Analyst Kate Austin discussed where earnings are headed and the correlation between earnings and stock prices in our recent quarterly webinar*: 2020 Conflicts—Impeachment, Tariffs & Global Dysfunction.
Please enjoy the excerpt below and click here for the full webinar replay to hear more.
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Kate Austin: The data from the fourth quarter of 2019 is just starting to be reported, and I’ll touch on that a little bit later. But last year, corporate earnings didn’t grow. In fact, they contracted slightly. And including returns in the fourth quarter of 2019, we had over 30% returns [for the stock market]. Similarly, in 2018 we had double-digit growth rates of corporate earnings, double digits. And we had a negative S&P 500 return for the 2018 year.
Kate Austin: So while the old adage of “stock prices follow their earnings” is usually true, it’s not always true, as we saw these past two years. So yes, it’s entirely possible, and something that we recently experienced. For the fourth quarter of 2019, though, so far (and remember not even 15% of the S&P 500 companies have reported earnings, so it’s still very early) revenues look like they have increased by about 2% and earnings have dropped by about 2%. So if you’re thinking to yourself, “Kate, this doesn’t make any sense. How is this possible? What’s really changed?” If we expect revenues to go up, we expect earnings would also go up. But many companies have actually cited increased costs in labor and higher input costs that they’re not able to pass onto the consumer.
Kate Austin: So while the consumer is strong, higher costs are actually pressuring earnings negatively. Many companies are implementing cost cuts and other strategies to bring themselves back to profitability or growth rates, really. Earnings growth rates. But we’ll really need to look at the rest of 2019 and 2020 to see if they are successful.
Jim Lowell: Okay. One of the things that you do of course, is similar to the bond point. You’re not looking at corporate earnings on average to make your investment decisions.
Kate Austin: No, no.
Jim Lowell: You’re looking for companies who are specifically showing earnings-growth strength?
Kate Austin: Exactly. We live in the weeds. We love to look at accounting, financial statements and all that stuff. I do love to say that I love to live in the weeds, so we don’t make a blanket statements by any means. We’re digging deep into the fundamentals.
*Webinar recorded after the market closed on January 23, 2020.
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