First-quarter earnings aren’t exactly off to a rousing start. But so far, investors have barely noticed.
Two weeks into Q1 earnings season, most of the reports have been disappointing. Of the first 82 S&P 500 companies to report January through March results, only 66% of them have exceeded consensus analyst expectations. That’s well below the one-year average beat rate of 71% and even further below the four-year average of 73%.
The banks set a sour tone for earnings season two weeks ago.
Earnings slipped last quarter at some of America’s largest banks, namely JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC). Even banks that grew earnings such as Citigroup (NYSE: C) and Wells Fargo (NYSE: WFC) saw a dip in revenue.
In many earnings seasons, the big banks are the market leaders. When they perform well – as they have more often than not in the years since the global recession – so do other companies, prompting stocks to climb. This season, however, the weak bank earnings have had little impact on the market.
And that’s a microcosm for what is occurring this earnings season. Despite an abnormally large number of earnings misses thus far, stocks have been relatively immune. Since Alcoa (NYSE: AA) unofficially kicked things off on April 8, the S&P has risen 1.4%. A 1.4% gain in two weeks doesn’t sound like much, but extrapolated over 52 weeks, that would amount to a 73% gain.
That relatively weak earnings have done little to slow stocks down is both a testament the power of this ongoing rally and a sign that other factors are driving the market right now. Namely, quantitative easing. QE3, the Fed’s monthly bond-buying program intended to accelerate America’s sure but slow recovery, is going on nearly 20 months now.
New Federal Reserve chief Janet Yellen has reduced the monthly bond purchases from $85 billion to $55 billion since taking the reins from predecessor Ben Bernanke in January. But the plug hasn’t been pulled yet – and that’s a good thing for investors. Since QE3 was initiated in September 2012, stocks have risen nearly 29%. As long as the Fed maintains its stimulus measure in some form, stocks are likely to keep rising.
For now, Fed policy trumps all – including earnings results. Investors can consider that a good thing this earnings season.
Weak Q1 earnings aren’t having the kind of negative impact on stocks they ordinarily would. If anything, the mere fact that earnings season is underway – and 66% of companies are beating expectations – has accelerated the rally.
That’s likely to change once quantitative easing ends. Until that happens, investors shouldn’t sweat the downside too much when buying stocks around earnings season.
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