The commonly accepted narrative about the rest of 2023 is that there is very little to be optimistic about.
First, we have to get over a debt limit debacle that should resolve itself to some degree within the next week or so. Then, we have to make sure the banking challenges we have seen stay isolated and do not spread. Third, we have to cope with an economic recession that has been imminent for over a year now. Fourth, we have to hope the Federal Reserve has not raised interest rates too high.
That is a pretty ugly list of what could go wrong.
Yet, stocks prices have generally risen year-to-date (of course, some more than others). How can stock traders possibly be pushing up P(rices) when the future is so fraught with dangers?
This week wraps up another E(arnings) season for publicly traded companies, and it unveiled a few clues about what corporate leaders are thinking about future uncertainty.
The first quarter’s earnings reports were much better than anticipated, but still showed earnings declined from last year. Heading into earnings seasons, analysts were projecting earnings would decline by 6.8% year-over-year in the first quarter. The final result will be closer to a 1.8% decline.
E(arnings) are holding up better than anticipated. Is it then possible that the next 12 months may not be as challenging as the last 12 months?
According to LPL Research, corporate leaders are expressing significantly less concern about the future in their quarterly conference calls with analysts:
- Only 20% of companies that make up the S&P 500 index mentioned the word “recession” in their conference call. This is the lowest level since 2021.
- Only 55% of companies that make up the S&P 500 mentioned the word “inflation” in their conference call. This is the lowest level since 2021.
- Only 3% mentioned the debt ceiling.
Maybe E(arnings) matter more than narratives and P(rices) for stocks are not as out of touch with reality as they may seem. Just maybe reality will prove more positive than the narrative over the next 12 months. In my mind, predicting the future is for those who do not know what they cannot know with certainty.
Given our disciplined approach to insulating our clients’ portfolio cash flow needs from short-term market volatility, we have the luxury of giving analysts and stock traders eight years to sort out any mismatches between narratives and reality. That is plenty of time for the future to convert to the past before needing to sell stocks.
While headline-grabbing narratives are always interesting by design, sometimes just covering your eyes and plugging your ears can keep you from getting distracted from your real goals.
If someone you care about could use some long-term advice in this short-term world, our advisors are here to help.
Quote of the week: Bob Farrell: “When all the experts and forecasts agree – something else is going to happen.”
