- August 3, 2022
- Blog , CJ Lawrence , The Portfolio Strategist - Terry Gardner
Earnings Forecasts Will Trend Lower, But That’s OK, Terry Gardner, C.J. Lawrence Commentary 7.20.22
Hi, good afternoon, everyone. It’s Terry Gardner from C.J. Lawrence. It’s Wednesday, July 20th. We’re coming to you from steamy Midtown Manhattan with some brief market commentary. Our last video ran just over 12 minutes, and we’re going to try to shorten this one up a bit. We’ve got three key points today that we want to cover, the first being that we want to discuss second-quarter earnings and the likelihood that earnings expectations for this year and next will trend down in the coming months. Then secondly, we want to highlight the counterbalancing forces in the economy that would likely cushion earnings and an economic decline. And then thirdly, we want to summarize our stance on the current market.
Terry Gardner, Jr. (00:44):
So first off, with regard to earnings, earnings season for the second quarter of 2022 has kicked off. It’s still early days, with only about 13% of the S&P 500 reporting. Earnings surprises to the positive side are coming in at about 68%. On average, we typically see that number on 75 to 80%, at least that’s where it’s been for the past decade. So a little bit below the earnings surprise average, but nothing egregious. We’ll keep an eye on that, but so far earnings look okay. But I think it’s fair that we should expect earnings expectations for this year and next to start coming down in the coming weeks and months. And why is that? Well, there are a bunch of reasons.
Terry Gardner, Jr. (01:29):
First off, the Fed is going to remain aggressive in fighting inflation. Why do we believe that? Because they’ve told us. There’s the old saying, don’t fight the Fed, and there’s another saying that I think we coined, which is don’t doubt the Fed. The Fed has told us that they’re going to be aggressive in fighting inflation. They’re going to be raising rates. 75 basis points is in the cards for the next meeting and another 75 basis points after that. They’ll be data-dependent, but the data’s going to take some time to come in, so it’s likely that the Fed is going to stay on their course of raising rates, and we’re taking them at their word. And when the Fed’s raising rates, it’s clear what they’re trying to do. They’re trying to slow an overheated economy or overheated inflation. So we should expect that their actions will result in a slower economy, and slower economic growth, which would likely have some impact on the labor situation as well.
Terry Gardner, Jr. (02:21):
What other signals are we seeing of a slowing in the global and in the US economy? First off, industrial metals prices have come off their highs and have declined over the last couple of weeks. Even oil prices, despite the very tight supply of oil, oil prices have come down in the last couple of weeks. Is that foretelling a slowdown in economic activity? That’s likely the cause. Fourth, the yield curve is inverted, and typically we see a yield curve inversion ahead of an economic slowdown or recession. Fifth, the 10 Year Treasury is having a tough time breaking through that 3% level, and so that’s telling us that the bond market is looking out and is trying to weigh inflation expectations versus economic growth, and is kind of stalled at this 3% level. The ISM readings that we’ve seen for the past couple of months have been weakening. Data that we got in the past week or two suggest the US housing economy is slowing, and consumer confidence readings are low and softening.
Terry Gardner, Jr. (03:32):
So to our second point, that kind of creates a bit of a bleak picture, but there are some forces at work that we think would cushion the impact of the Fed’s activity and the slowing economy, and they would include the supply chain, which is starting to see some easing. You’re starting to see a better flow of goods to market. Corporate and consumer balance sheets are healthy. We’ve been talking about this for quite a while, so the consumer and US corporations are in a better condition to withstand any economic slowdown. Third, employment remains very strong with record low unemployment. So it’s very rare that you would have a significant weakening in the economy when employment is so strong. Fourth, banks are healthy and the financial system is fluid, so that’s an important underpinning for an economy that’s kind of working well. Fifth, credit spreads have widened, but are not stretched. And then finally, we’re starting to see some signs of disinflation, they’re starting to emerge.
Terry Gardner, Jr. (04:39):
So with regard to the broader market then, our final point or our summary, I think it’s fair to assume that it’s going to be challenging for the market to make meaningful advances while earnings expectations are trending down. So we’re going to be in this tug of war period likely for the next several months, if not quarters. But to the other side, a large number of stocks in the S&P 500 and in the broader indices have seen significant declines in the first half, and some are very attractive now on a risk-reward basis. So there are selective opportunities in the market, regardless of how the broader market performs.
Terry Gardner, Jr. (05:22):
We continue to like the strategy that we outlined in our last video, in which we coined a focus on the three S’s. If you want to do a deeper dive into that, go back to our YouTube channel and take a look at the video that we produced just a couple of weeks ago where we talk about the three S’s, which are the secular growers, the scarcity plays, and then finally business models that have an enterprise subscription base. We continue to like companies that embody those characteristics.
Terry Gardner, Jr. (06:00):
And then finally, our final point would be to stay invested. It’s, again, very difficult to time the market and to find points of entry and points of exit. I was handed a very interesting chart, which I wanted to share some statistics with you. I wish I had produced it. I didn’t, it’s from Fidelity Investments, giving them full kudos, and the table shows the hypothetical growth of $10,000 if you invested in the S&P 500 on January 1 of 1980. The point of this chart is to show you that, is to stay invested, because if you miss out on big days, you miss meaningful performance. So if you had invested, on January 1 of 1980, $10,000, this table takes us through March of 2021, so about a year ago, but you’ll get the point. And if you had stayed invested with that $10,000 through that period of time, you’d have 1.1 million today, or at the end of this period of measurement, which is about a year or so ago.
Terry Gardner, Jr. (07:09):
If you had missed the best five days of trading during that period, you would’ve missed out on 38% of that performance, or you, at the end of this period, have $676,000. So 1.1 million versus 676,000 just by missing the five biggest trading days. And think about the compounding that happens through this period of time on the back of those big days. If you had missed 10 days, you’d miss 55% of that upside performance. You miss 30 days, almost 84%. So, the point is it’s very difficult to get in and out of the market. Even when you see some storm clouds, if you’re a long-term investor it’s worth staying in, because the rebounds are powerful, and with the power of compounding, meaningful returns can be achieved over periods of time.
So that’s the summary for today. If you’ve got any questions on any of our work or want to talk about your portfolio, please reach out, tgardner@cjlawrence.com, or give me a call at 212-888-6403, and have a great rest of your summer.