The Bull has written many times that the most important factor in valuing a company is how much profit it can earn. Higher profits mean higher values. Most public companies have now reported their third quarter earnings. Eighty two percent have exceeded estimates and sixty two percent also exceeded revenue estimates. This past quarter, companies’ earnings are also growing again after having been slightly down or stagnant for the last few. They are 3.7% over the same quarter last year. With earnings growing again so are their stock prices – should be no surprise here.
Late last year and at the beginning of this year, many economists and Wall Street strategists were predicting earnings to decline by twenty percent or more for 2023. They were about as accurate with this prediction as they were with forecasting a recession this year. Our economy and companies have outperformed most expectations. Unfortunately, there are still an unusually large number of pundits, that instead of conceding their error, simply are extending out when they expect a recession and lower earnings to occur.
This negative bias continues to keep many investors very cautious. As more and more evidence emerges that the business environment is healing or is indeed actually good, then, hopefully, this sentiment will be reflected on Wall Street. Yes, the S&P 500 index is up this year, but the average stock is not. The index returns have all come from just a handful of very large growth companies. As sentiment improves, look for a broadening out in the number of stocks adding to positive performance. We expect this by the end of this year or perhaps the beginning of 2024. Stay steady my friends.
The Lonely Bull