From the desk of Willie Delwiche.
Key Takeaways:
- Analysts and economists no longer chasing reality higher
- Downward earnings revisions coming with stocks priced for perfection
- Persistent inflation and higher bond yields would be a new experience for many investors
The past year has been one of widespread earnings surprises and large upward revisions. Whether those trends can remain intact as Q3 earnings season gets underway is one of the more important questions the market has to wrestle with right now. Expectations are elevated going into the quarter, but a number of the factors that fueled the earnings strength of the past year are starting to ebb. I have my suspicions that Q3 earnings season will be a repeat of the recent past.
At the end of the day, price is what pays. We don’t want to forget that, but we also want to keep an eye on whether (and how) investors’ expectations are being met or not. In each of the first two quarters of 2021, the earnings growth rate at the end of earnings season was nearly 30 percentage points higher than what was expected when the quarter ended. That is a clear case of expectations being exceeded - and to a historically high degree.
