Are We Heading for a Bubble?
First, a quick investing refresher. At its most basic, stock is just an ownership share in a company. Which means, pretty simply, owning stock (aka equity) entitles one to a portion of a company's earnings in perpetuity. And while that might seem ambiguous (especially for non-dividend-paying firms), the takeaway is that there is a tether between a stock’s price and its earnings. Perhaps not in the short-or even the medium-term (stock prices can be far more volatile than their underlying fundamentals), but in the long-term, fundamentals do matter.
With investor focus homing in on everything from geopolitics, to the Federal Reserve’s tapering language, to CPI, it sometimes pays to step back and just see how US company earnings are doing. And the answer is: outstanding. Just to run through a few numbers from the quarter ending March 31:
- 86% of companies have reported earnings per share (EPS) above estimates. This would mark the highest percentage since FactSet began tracking the metric in 2008.
- In aggregate, earnings are coming in 23% above estimates. This is well above the 5-year average of 7% and would mark the second-highest percentage since FactSet began tracking this metric in 2008 (spotting a trend?)
- The blended earnings growth rate for 1Q21 is 50%. This is versus an estimated growth rate of 24% just six weeks ago (and would mark the highest year-over-year earnings growth since 2010).
- The S&P blended profit margin for 1Q21 is 13%. This is above the 5-year average of 11% and would mark the highest net profit margin reported by the index since FactSet began tracking the metric in 2008.
- Analysts project double-digit earnings growth for the remaining three quarters of 2021. Earnings grow this expected to peak in 2Q2021 at 59%.
- Companies are issuing strong outlooks. At this point in time, the percentage of firms giving positive earnings guidance (an in-house forecast given ahead of actual results) is 59%, which is well above the 5-year avg. of 35%. Not half bad at all.
Now, stocks are forward-looking animals, so a lot of this strength is already priced into a market near all-time highs. And we never attempt to predict the future. But it’s still comforting to know that one of the key underpinnings of the entire market—corporate earnings—are justifying prices to an extent.