The financial world’s “earnings seasons,” which are when many public companies disclose their earnings performance for the past quarter, is like the playoffs in sports because we can see who the winners are, and who are the also-rans.
Many times, winning in the earnings season ushers in more victories down the road, and vice versa. But this past earnings season was atypical, and the end result was the volatility we experienced in October and parts of last month.
It was a bit out of the norm because earnings were actually good and in line with our current bull run, yet many firms made forward-looking comments about darker times ahead. Unsurprisingly, that frightened investors and had them seeking less-risky alternatives.
But while companies may be bearish on the future, financial analysts are not. I’ve seen many analysts remain steadfastly gung-ho on the S&P 500, calling for growth above 9 percent in 2019, and more than 10 percent in 2020.
Wall Street is Being Bull-Headed
This leaves us in a situation where those behind the performance are saying one thing, while those analyzing the performance are saying something much rosier. As for me, I’d tend to believe those driving the train, rather than those observing its path.
For one, revenue growth has been slowing among the S&P 500 companies and it’s expected to continue, which was one of the key takeaways from the earnings season commentary. On top of that, much of the growth we’ve experienced has been the result of corporate stock buyback efforts and numbers that look better because of President Trump’s tax cuts.
Of course, uncertainty around the world doesn’t help either.
Whether it’s unmanageable foreign debt, trade policy skepticism, decreasing demand, or a host of other potential risks, investors are increasingly wary. Even the Federal Reserve is being cautious, as just last week the Fed cited several of these concerns as reasons to consider slowing interest rate increases.
Lastly, what seems like consensus around future earnings is just too optimistic, in my opinion. As I mentioned, some analysts are calling for near double-digit percentage growth in each of the next two years.
At the same time, we have historically low unemployment and increasing wages, both of which are signs of a strong (and tight) labor market. Factor in tariff-related costs, supply chain issues produced by tariffs, and slowing demand — it makes you wonder how analysts think profits will grow at such a clip when cost pressures are so prominent.
Consider the Sleeping Bear Poked
We all know it’s unwise to poke a sleeping bear. If the bear wakes up, you don’t want to be around.
We must then ask — is a bear market near?
When will it happen?
I don’t know, and neither does anybody else because nobody can predict the future.
Still, it’s fair to say much of the data out there right now points towards a down market ahead. In other words, the bear has been poked.
Perhaps it will go back to sleep and let the bull keep running. But again, we don’t know what next week, next quarter, or next year have in store. For now, caution is the course — it’s not like you need to exit the market completely if you don’t want to.
However, it may be wise to consider alternative investments if market volatility is a little frightening. Recent trends show real estate is becoming more popular, while other investments like cash-value insurance policies and annuities can provide returns without the rockiness.
The point is, if future growth estimates seem a bit too “blue sky,” there are options out there for investors who don’t want to step in what the bull leaves behind.
Holly Peterson is the owner of Elite Retirement Strategies and a former radio show host. You can find her online at eliteretirementstrategies.com or by calling 208-252-4345.