Strong Corporate Earnings and Unfavorable Inflation Expectations

It wasn’t just the price of pork chops.

Last week, as investors weighed the news, strongcorporate earnings were offset by higher grocery prices and rising numbers of globalcoronavirus cases.

Solid corporateearnings weighed favorably.

So far, 25 percent of the companies in theStandard & Poor’s (S&P) 500 Index have reported first quarter earnings,and 84 percent said profits grew faster than expected, reported John Butters ofFactSet. The blended earnings growth rate for the S&P 500 (whichincludes estimated earnings for companies that have not yet reported and actualearnings for companies that have) was 33.8 percent last week. For context, the 5-year average earnings growth rateactual earnings) for the S&P 500 was 6.9 percent as of last week.

It’s important to remember the impact ofearnings is often muted as earnings expectations – good or bad – tend to bepriced into the market long before they are reported.

Inflation expectationsweighed unfavorably.

Investors were concerned about inflation – andso were consumers. While the Federal Reserve and many economists believe we’llsee a fleeting uptick in inflation, others think the increase will persist. “…Aconsistent drumbeat of price hikes from major companies, consumer reports, andmarket data suggest the world may not be going along with their conclusion,”reported Dion Rabouin of Axios.

It is likely markets may pay particularlyclose attention to Federal Reserve statements about inflation and interestrates this week.

Rising numbers of Covid-19cases around the world tipped the scales.

Concerns about India’s coronavirus surge,Japan’s state of emergency, and rising numbers of cases around the world causedinvestors to reassess expectations and some sold shares of companies that wereexpected to benefit from the re-opening of world economies. Yun Li and MaggieFitzgerald of CNBC reported:

“The sell-off inshares that are tied to a successful reopening came as the World HealthOrganization warned that global coronavirus infections were edging toward theirhighest level in the pandemic. In the United States, while the country ismaintaining a pace of 3 million reported vaccinations per day, about 67,100daily new infections are still being recorded.”

Despite uncertainties, most (67 percent)professional investors who participated in Barron’s Big Money Poll saidthey were bullish on the outlook for stocks in the next 12 months. Just 7percent were bearish.

Major U.S. stock indices finished the weekflat or slightly lower. U.S. Treasuries rallied briefly before finishing theweek flat.

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Womack Investment Advisers, Inc.

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Womack Investment Advisers, Inc. (WIA) is a registered investment adviser whose principal office is located in Oklahoma. Womack Investment Advisers, Inc. is also registered in the State of California, the State of Illinois, the State of Indiana, and the State of Texas. WIA only transacts business in sates where it is properly registered, or excluded, or exempted from registration requirements.

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