Mullaney on the Markets

Sidestepping an Earnings Recession

By Michael Mullaney

Director of Global Markets Research 

May 2019

As of the end of April, 381 of the S&P 500 companies had reported Q1 earnings, with 76% of those who reported having topped consensus expectations by an average 5.6%. This compares favorably against the 72% five-year average for the percentage of companies beating expectations and the average incremental earnings gain of 4.8%.

Consensus expectations for the results of the remaining companies yet to report still project a -0.8% year-over-year result collectively for this earnings period. However, if the actual results follow the typical historical pattern of upside beats and surprises, then a positive Y-O-Y result for the period shouldn’t be ruled out. Such a scenario would go a long way in helping to avoid the “earnings recession,” which had previously been anticipated. Earnings growth expectations for 2019 have troughed, and are now being revised upwards. The 2020 EPS forecast remains a healthy +11.3%.

Through April the S&P 500 was on pace for a 66.5% annualized return, a level that remains unjustified by either macro trends or fundamental factors. As such, a pause or pullback in price action should not surprise investors. This should not signal an end to the bull market. Announced stock repurchase plans from corporations should result in realized buybacks in excess of $900 billion in 2019, which would help to offset the lack of conviction toward the market advance by many market participants. Still, stocks continue to “climb the wall of worry” and the “pain trade” appeared to be to the upside of current prices as of the end of April.

In terms of sector returns, there were some significant reversals that occurred during April. Financials, the second-worst performing sector through March, took the pole position with a gain of 9.0%, helped by higher rates and a re-steepening of the yield curve. REITs, the second-best performing sector in Q1, gave back some of its gains in April (-0.47%), hurt by the same factors that boosted Financials. The No. 1 laggard for the month was the Health Care sector (-2.63%), which was besieged by the prospect of “Medicare For All” becoming a reality. Trading activity in Health Care was reminiscent of the lambasting the sector took in 2010 when the Affordable Care Act was being formalized. Meanwhile, communication Services (where Facebook, Netflix and Google reside) was the second-best performing sector during the month, returning 6.53%.

Year-to-date, Technology remained the top performing sector with a return of 27.56% and maintained a comfortable lead over the second-best performer, Communication Services, at 21.41%.

Similar to March, small capitalization stocks lagged large-caps with the Russell 2000 index gaining 3.40% during April while the large-cap Russell 1000 Index advanced by +4.04%.  This caused the Russell 2000 Index to slip below the Russell 1000 Index year-to-date, +18.48% to the large-caps +18.60% return.

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Boston Partners Global Investors, Inc. (“Boston Partners”) is an investment adviser registered with the SEC under the Investment Advisers Act of 1940.  The views expressed in this commentary reflect those of the author as of the date of this commentary.  Any such views are subject to change at any time based on market and other conditions and Boston Partners disclaims any responsibility to update such views.  Past performance is not an indication of future results. Discussions of securities, market returns and trends are not intended to be a forecast of future events or returns.  



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