Thursday, March 31, 2022
Stocks have rallied back nicely over the past couple of weeks, with the S&P 500 up more than 10% off its March 14 low. While some would suggest that the market is sniffing out a potential compromise to end Russia’s military aggression in Ukraine, which is certainly possible, that’s probably not the whole story. Although the odds of a more widespread conflict may have fallen recently simply because of the limited involvement of the U.S. and its NATO allies thus far, corporate profits may be another element of the bulls’ thinking in driving the latest rebound.
Not only are U.S. earnings estimates holding up in the face of war overseas and the highest inflation in 40 years, but also analysts’ estimates for S&P 500 Index earnings per share over the next four quarters are actually up in March. Not by much—only about 1.5%—but they are up despite the challenges. Remember inflation means higher prices for companies selling those products, and those companies are enjoying quite a bit of pricing power right now and therefore, able to pass along higher costs to the end customer. Of course, no industry is seeing stronger growth right now than oil & gas producers, propping up profits overall. Look for more from us on earnings season in an upcoming Weekly Market Commentary (found on lpl.com in the newsroom).
As shown in the LPL Financial Chart of the Day, the U.S. stands out globally with its favorable earnings outlook. “On the back of energy independence, the trajectory of U.S. corporate profits has been unaffected by rising energy costs and high inflation so far,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “Conversely, earnings expectations in international markets have fallen in March. The U.S. profit outlook is the envy of the world right now.” This is a particularly good place to be as companies close the books on the first quarter today and first quarter earnings season approaches.
The reduction in earnings estimates for developed international markets this month has been marginal (minus 0.1%) based on the Europe-heavy MSCI EAFE Index, though we see some potential downside risk given Western Europe’s dependence on Russian oil and gas. The picture looks much worse in emerging markets (EM), where the regulatory crackdown and ongoing COVID-19 lockdowns continue to weigh on China’s economic growth. The MSCI Emerging Markets Index has seen its consensus earnings per share estimate for the next four quarters fall more than 6% in March alone.
This earnings divergence supports LPL Research’s high conviction in an overweight allocation to U.S. equities, at the expense of their international developed counterparts. For EM, where we remain neutral due in large part to attractive valuations, stimulus from China, and our desire for some equity diversification, but we are watching other signals—both fundamental and technical—closely in an effort to manage the heightened risk around investing in China.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.
- Not Insured by FDIC/NCUA or Any Other Government Agency
- Not Bank/Credit Union Guaranteed
- Not Bank/Credit Union Deposits or Obligations
- May Lose Value
For Public Use – 1-05262944