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two business men looking over an earnings chart

Why do you invest? Ok I get it... you probably invest because you're trying to retire at some point in your life or you'd like to make some major purchase in the future. But why are we putting money in the stock market? What's the benefit of investing in companies like Apple, Boeing, Google, Berkshire Hathaway or JPMorgan Chase? Considering that the Schwab Money Market is paying close to 4.4% today, why not just keep the money in there? The answer is the same reason why some of America's richest citizens are exactly that... the richest citizens.


Let's start with Jeff Bezos; for nearly two decades his salary from Amazon was $81,840. Is that how he became one of America's richest men? Certainly not! The reason was this: he owned shares of a business (that he founded) that continued to grow in value over time. Controlling shares of companies (owning a business) is a common trend amongst the world's wealthiest individuals and families. And what a time to be alive because you get to put money into these publically available companies every two weeks through your 401(k) and Roth IRA. The richest family in America? The Waltons and half their wealth is in a publically traded company, that their patriarch, Sam Walton, founded called Wal-Mart.


Starting a business is the single best way to get rich in America. The next best way? Piggybacking off founders like Jeff Bezo of Amazon, Sam Walton of Wal-Mart, Elon Musk of Tesla, SpaceX, and StarLink. And the reason those companies are worth more and more over time is that over time their earnings continue to grow. They grow because their top line (sales) get larger, they grow because they cut expense through efficiency, they grow because they as a company have investments that are adding income. Earnings are what drive the value of a stock. It's called cash-flow. You're buying the cash flow, current and future, of a company when you invest in them. Yes, sometimes you invest in a company that has an erroding cash flow, and it proves to be a bad investment. But on the aggregate the stock market is full of companies that are continuing to make more today than they made yesterday in cash-flow.


Therefore with that introduction - let's answer the question of what is happening to earnings right now. If you listen to my weekly market video "What We Learning in the Markets The Week," we discussed how corporate earnings are a standstill right now. Why is that?


While major stock market indices have rallied this year, investors continue to receive mixed signals from the economy. On the one hand, inflation is improving, which has allowed interest rates to stabilize at a lower level. On the other hand, last week's jobs report was a significant surprise to the upside, with 517,000 net new jobs created in January and the unemployment rate falling to 3.4%, the lowest in over 50 years. Although the inflation data suggest the Fed could slow or pause its rate hikes, the jobs data mean that they may need to keep their guard up. This uncertainty creates confusion as markets adjust to financial conditions. What should long-term investors focus on to stay invested toward their financial goals?


The stock market follows earnings trends over years and decades


S&P 500 Index Price chart

Stock market investors don't directly invest in the economy. Instead, they are impacted by economic trends through the revenues and profits of the companies in which they invest. When the economy is growing rapidly and consumers are doing well, company sales tend to improve. When inflation is rising or the job market is competitive, costs may rise. At a macroeconomic level, the job of companies is to balance these opportunities and risks. Over long periods of time, the stock market tends to follow earnings trends, which in turn follow economic cycles.


Given the importance of earnings, it's no surprise how much coverage there is of individual company earnings reports in the news and in the investment industry. However, for long-term investors, the aggregate earnings picture for the S&P 500 matters much more. At the moment, about 50% of S&P 500 companies have reported fourth quarter earnings. This was a quarter during which costs were elevated compared to the year before due to inflation and rising wages, while consumer spending was weakening and there were fears of an upcoming recession.


This led to lowered earnings estimates which has allowed 69% of S&P 500 companies that have reported to beat expectations so far, while 65% have beaten on revenues. Overall, S&P 500 companies are estimated to have grown earnings by 7.4% in 2022, but will only experience 3.5% growth over the next twelve months, before accelerating again in 2024.


Earnings are expected to slow across market categories


US Stock Size and Style Earnings and Valuations chart

Just as many economists expect flat or slightly negative economic growth in 2023 before seeing a recovery in 2024, many expect earnings growth to be meager this year as well. In this way, both sets of data point to a "reset" as the world adjusts to the shocks of the past few years - or as many investors like to refer to it, a "v-shaped recovery." In this context, there are two facts to keep in mind.


First, corporate earnings are still at record levels for large cap companies with S&P 500 earnings-per-share reaching about $218 on a trailing basis. Analysts are not anticipating negative growth in 2023 - just slower growth to no growth. This does differ across market size and style categories, however. Mid caps (or Aggressive Growth in our Dave Ramsey vernacular), for instance, are expected to see earnings decline in 2023 while small caps (also Aggressive Growth) could see faster growth. However, both of these size categories are much more attractively valued than their large-cap counterparts, despite these earnings trends.


Second, if inflation continues to slow, costs may improve and help support profitability across companies of all sizes. After all, rising costs due to higher goods prices and growing wages have crimped earnings over the past year. Similarly, if consumer confidence returns and spending rebounds, this could help prop up earnings.


This is a balancing act since the flip side of consumer spending is wage growth, which represents higher costs for businesses. Wages are still growing 5.1% year-on-year, but this has eased from recent peaks.


Corporate costs could improve as inflation eases


labor Market Wage growth chart

Of course, the specific circumstances differ across individual companies and industries. Thus, it's also positive that seven of the eleven S&P 500 sectors are expected to experience positive earnings growth over the next year, despite the challenging environment. The exceptions are the commodity-sensitive materials and energy sectors which benefited from rising prices last year, and the real estate sector which has been directly hit by rising rates.


It's important to keep in mind that analyst forecasts are not always accurate and are subject to change based on economic conditions. Still, expectations for this year align with slower growth trends across the economy. However, they also suggest that earnings could rebound once the underlying fundamentals improve and inflation stabilizes. Either way, record earnings continue to support valuations which are the most attractive in years.


The bottom line? To cut through the noise, investors should continue to focus on their long-term goals and enjoy the fact that they're getting to own some of the best companies the world has ever seen. Continue to execute your current Baby Step and reach out to one of our Financial Coaches for help on Baby Steps 1, 2, and 3 and our Financial Planners for Baby Steps 4, 5, 6, and 7! Let's continue to live and give like no one else!


 

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.


CORPORATE EARNINGS: IT'S WHAT YOU'RE BUYING!

February 15, 2023

John-Mark Young

Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm.  The information presented is for educational purposes only and intended for a broad audience.  The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed.  Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner. 

Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. 

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

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