Earnings Have Outweighed War Concerns

Earnings continue to move stock prices higher as April generated the highest monthly return for the S&P 500 since 2020.  With almost 90% of the S&P 500 companies reporting first quarter earnings, results were 18% higher than consensus expectations and are 25% higher than a year ago.  Sales were up 10% year-over-year, and profit margins remain at record levels.  As a result, analysts continue to raise their estimates for each quarter and for 2027.

Meanwhile, the Fed left short-term interest rates unchanged citing “economic activity that has been expanding at a solid pace… while the unemployment rate has been little changed in recent months.”  However, they also noted that “inflation is elevated, in part reflecting the recent increase in global energy prices.”  The yield on the 10-year Treasury is roughly where it was a year ago.  The latest labor statistics were stronger than expected and consumer spending remains resilient despite higher gasoline and energy prices.  Housing starts and capital goods orders for March were strong and above expectations.

Perhaps the biggest uncertainty looking ahead is the length of time the Strait of Hormuz remains closed.  This is truly a global chokepoint, and companies are providing caveats to their forward guidance.  The impact from continued increased energy costs and supply chain constraints could pressure future corporate profit margins.

Equity valuations began the year at very high levels compared to historical measures.  The strong first quarter earnings have compressed those multiples somewhat, but they remain above average.  Valuations are not a market timing indicator, but an indication of potential market risk.  If future earnings disappoint, a correction would be likely.

While federal debt continues to spiral out of control, corporations have been deleveraging, and their balance sheets are in strong shape.  They have been returning cash to shareholders in the form of both dividends and share repurchases.  We prefer to buy companies with the ability and the propensity to regularly increase their dividends as it is one good indicator of a strong business model.

Of course, in any market environment it is critical to have a long-term investment plan that is tailored to your specific goals and risk tolerance.  Market pullbacks and corrections are inevitable and normal, and having an asset allocation that enables you not to panic and sell in periods of market downturns is the key to long term investment success.

-The LVM Team