So, we’ve got this chart. Courtesy of the folks over at LPL Financial Research. Let’s talk about it.
Earnings season is here and it’s the most wonderful time of the year. It's a time when sales results and sales forecasts frolic among the financial media riding an emotional roller coaster of optimism and gloom. Depending on each corporation, and sometimes its respective sector, in the marketplace it can be a time of great cheer, or a time of great despair. It was the best of times, it was the worst of times sort of thing.
Each quarter, all publicly traded companies are required to release their previous quarters’ sales results (along with a litany of other numbers) as well as their sales forecast for the rest of the current year. You will hear phrases like ‘top-line revenue growth,’ ‘bottom-line revenue growth,’ and ‘cost cutting measures.’ The media will dazzle you with analysis from so many experts you may or may not get a migraine.
Alright, I’ve had enough fun. Seriously though, all these earnings reports can be good indicator of sector and over-all stock market performance. Corporate earnings are a fundamental driver of the economy and the stock indices. If the corporate world is doing well, it usually means the consumer is doing well. If both of those entities are doing well, normally the overall American economy is doing well also.
What this chart is trying to tell us is that various sectors are expected to perform better than others. AKA certain sectors are expected to ‘drive the market.’ We are currently in a rising interest rate environment which has various reverberations in the marketplace. Generally speaking, when the Federal Reserve is increasing rates, the utility sector, the telecommunications sector and the real estate sector tend to suck (I hate to use technical jargon like that, but it’s true). Places like financials, industrials and materials tend not to suck during an environment when rates are going up. We’re starting to see these trends develop in 2017 thus far. Although, real estate is holding up pretty well year-to-date all things considered.
Alright, so why did I choose this chart and subsequent explanation to share with you? Well, I found it interesting. Ok? So, sue me. Really though, it was because I’m fascinated with how much specific companies and market segments are driving the all-time highs in the stock indexes we’re seeing right now. A handful of companies are having huge years in 2017 and therefore pulling the S&P500 upward along with them, not all 500, basically just a handful are. It’s really remarkable, at least to me. With that said, it appears that this trend should continue, according to the chart above. I do not have a prediction of any kind because I’m not Nostradamus or a fortune teller. All I wanted to get across with this chart is that corporate earnings look fairly healthy right now. That makes me happy, as it should you as well.
Ok, that's it. I'm done.