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.
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