Market Look & Earnings Parade – Monday Morning Market Memo – May 3, 2021

Market Look & Earnings Parade – Monday Morning Market Memo – May 3, 2021

Good morning,

The major stock market averages finished little changed last week, but posted nice monthly gains – with the Dow Jones Industrial Average gaining about 2.5%, while the Standard & Poor’s 500 Index and NASDAQ Composite each jumped over 5% in in April – giving the broad market a three-month winning streak.

This positive market momentum has been generated by things such as monetary and fiscal stimulus (read government support), positivity surrounding the vaccination story, the economic reopening, and a rebound in corporate earnings – which continue to come in ahead of market expectations.

According to FactSet, 60% of the companies in the S&P 500 have reported actual results for the first quarter of 2021 – of these companies, 86% have reported actual EPS (earnings per share) above estimates, which is above the five-year average of 74%.  If 86% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies reporting a positive EPS surprise since FactSet began tracking the metric in 2008.  Looking at some individual earnings reports…..

Last week was the busiest week of earnings season (dominated by big tech), and plenty of stocks were on the move based on their quarterly results: Alphabet reported a big beat on earnings and revenue, spelling out a gain of over 3% for the share price;  Facebook shareholders were all smiles after seeing their stock jump over 7% on better-than-expected earnings and revenue; Pinterest shareholders on the other hand, were feeling prickly, as the stock fell nearly 15% after the company missed user growth expectations; Twitter stock flew lower (also about 15%) after missing on user growth expectations and providing revenue guidance below market expectations; Domino’s Pizza and Hershey shareholders liked the taste of around 3% gains in their stocks, as both companies reported earnings above street estimates….

Looking at perhaps the most widely followed reports, Apple and both reported blowout quarters, with earnings and revenues that blew past estimates.  Still, both stocks closed slightly lower, leading to many questions as to why the stocks were not higher after such positive results?  Without getting into these reports specifically, which is too lengthy for this format, we will discuss market reactions to some earnings reports in a general sense.

For starters, whisper numbers – which Investopedia defines as the purported, unofficial, and unpublished earnings per share forecast of professional traders and fund managers on Wall Street – can often be much higher than consensus estimates, and stocks may sell-off if earnings results are below the whisper numbers.  Secondly, the stock market is forward looking, and sometimes if numbers are so good the opinion forms that the situation is “as good as it gets,” with investors expecting future results to be less impressive.  To an additional point, we are reminded of a couple relevant quotes – one by famed investor Bernard Baruch, stating “The main purpose of the stock market is to make fools of as many men as possible” – and the other by legendary trader Jesse Livermore, declaring that “The stock market is never obvious.  It is designed to fool most of the people, most of the time.”

More earnings to come in the week ahead!

All the best – Southport Station Financial Management, LLC