With increased volatility in recent weeks, the US market is anticipating a tough earnings week. Investors fear missed expectations could change the narrative of strong global fundamentals. Strong earnings are believed to decrease volatility in current market and return optimism to the stage. With a market correction for the first time in two years, the SP500 closed below its 200-day moving average, down 2.6% from the beginning of the year. The S&P 500 recently traded at 16.3 times earnings estimates for the next 12 months, down from 18.6 times in January.
Historically, US companies beat earnings expectations 68% of the time, and in the recent year have beaten earnings expectations 75% of the time. Tax cuts are leading to high expectations of profits, which are estimated to go up by 17.1% from a year ago. Yet even with tax cuts effects excluded, the firms in the. S&P 500 are expected to post double-digit earnings growth, Keith Knutsson of Integrale Advisors commented, “The main reason behind the strong press attention in regard to market volatility is purely out of contrast; after exiting one of the least volatile times in history, any change will seem dramatic. Taking into consideration the current Equity Risk Premium, investing is a good idea in the long-term.”
Trading data suggests that hedging tools for further falls in the market have been less active than expected, reflecting a positive outlook. In the past stocks do not enter a bear market until earnings expectations turn down. Regardless, poor performance in the coming weeks can amplify fears from the past.