The stock market reacts lukewarm to excellent results
The two Js
The stock markets seem to have found the way up again after the appearance of the two J’s on Wednesday evening. First, there was the Federal Reserve Governor — Jay Powell — who stated that, for the time being, he saw no reason to change the current policy of the central bank. No change in interest rates and they continue to buy USD 120 billion worth of government and mortgage bonds every month. This is despite growing concerns about the now somewhat overstrained housing market in the United States. Later in the evening, the main act followed: the appearance of Joe Biden in Congress. In his first speech to both the House of Representatives and the Senate, the President declared that the House of America was on fire 100 days ago, but is now ‘ready for take-off. The successful vaccination programme and the enormous state support are doing their job, as can be seen from the much improved economic figures.
The greatly increased growth expectations for the US economy did not come out of the blue. After all, American business is showing an enormous recovery after the pandemic collapse last year. This is evident from the reports of company results for the first quarter so far. An almost laughably high percentage of companies reported higher profits than expected. And not just a little higher, but in many cases considerably higher. For example, at the beginning of the quarter, the expected profit of the 500 companies in the S&P 500 index was still over 23%, but this has now been increased to over 33%. If that percentage actually reaches the current 86 percent of companies, it will be the highest number ever to report a higher-than-expected profit.
Nowadays, profit is nothing more than an opinion. Insiders know all too well that there are many roads that lead to a good profit figure. And these days, these roads are being flattened considerably. That is why it is often more interesting to look at the turnover of companies. There is less to haggle with. But these too have exceeded all expectations to date. No less than 77 percent of companies have so far reported higher than expected turnover. In short, compared to this time last year, the American listed companies are in good health. Something that, incidentally, was once again underlined this week by the figures of four companies from the so-called Big Five. Apple, Microsoft, Alphabet and Facebook exceeded expectations, and not by much. The fifth, Amazon, will follow tonight, and you can be sure that this giant will not disappoint.
Now there is a strange phenomenon at the fair. The roof must have become completely porous by now because of all the profits that keep popping through. But, while the profits are celebrating, the prices are sitting somewhat timidly on the sidelines. There has not been much movement in recent weeks. Since the start of the earnings season (mid-April), the leading indicator of the US economy — the S&P 500 index — has risen by a paltry 1.4 percent. This is in spite of the fact that profits are expected to rise by more than 33%. Even more striking is the reaction of the shares to the reported figures. Whereas the share price normally rises by an average of 1.5 percent after an earnings beat, this number season the share prices have fallen by an average of 0.1 per cent. So the reaction to the frankly fantastic company results has been rather lukewarm.
Ownership of the business
Here, the well-known stock market motto “the possession of the business is the end of the fun” seems to apply. The prices had apparently been anticipating these excellent results for months. Since the presidential election and the arrival of the first vaccine, the S&P 500 index had risen by 28 percent. Investors had amply anticipated these gains and now seem to be cashing in their profits here and there. Another stock market wisdom warns against such situations. It says that when even such good results can no longer move the prices, all the good news is priced in and it is high time to leave the arena. What is it that is supposed to get the prices moving?
Hold in May
Nevertheless, we can put a caveat to this. Examination of all the quarterly figures shows that the reaction in the stock market is usually the result of previously expressed expectations. If the consensus among analysts expects a disappointing season in advance, a rise in the stock market often follows. The setbacks were already priced in and things could only turn out better. Conversely, every time the expectation pattern was high, the prices actually fell. The windfalls were already priced in and it could only be a disappointment. In spite of the lukewarm reaction, this time it seems to have turned out differently. Now that all major technology funds except Amazon have been gone, we can say that although the reaction is tepid, it is still positive. The S&P 500 is in fact higher than at the start of the figures season. And this despite the fact that, as mentioned, the expectations were quite high. So, no decline. This year, no Sell in May and stay away, but Hold in May and stay close.
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