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How Earnings Season Could Impact Your Portfolio
Corporate earnings season is upon us, and it may impact your portfolio more than you think.
October and most of November was a good time for the stock market. We have seen a good bounce from the lows we were at the end of the third quarter.
Now that earning season is creeping up there are some concerns about how stock returns may be impacted.
Fed rate hikes are set to slow but still are going in the wrong direction. Companies are likely to really start feeling the effect of inflation. The recent bounce may have inflated expectations.
Fed Rate Hikes
Early last week the Fed signaled that it was appropriate to slow the advance of lower rate hikes.
What does that mean?
Even though the Fed views its current restrictive monetary policy as appropriate, it will begin start incorporating lower rate hikes into its strategy.
What we are likely to see are smaller 50 or 25 basis point increases. While this is a step in the right direction, we are still not quite to the point where rates will stagnate or eventually come down.
I wrote here my outlook for future interest rate policy.
As the Fed continues to see progress it will become less restrictive. My projection is we should see a loosening of monetary policy sometime between June and September of next year.
This is generally good news for stock investors. Inflation should be under control at this point, putting less pressure on the consumers. Consumers will then have more money to invest and hopefully propel the stock market to new highs.
We are still a few months away from seeing this Fed pivot. But the signs are encouraging for the long term.
What is more concerning is what may happen in the short term.
Corporate Earnings Could Drag Down the Market
Many companies are hurting because of higher cost of doing business.
Not just mom and pop shops, but bigger corporations are too. While these companies likely are not going to go out of business, their profitability will certainly be affected.
At the end of the day profitability, or the expectation of future profitability, is the biggest driver of stock performance. If the future expectation is lower than the stock price normally follows.
And that is exactly where we are this earnings season. Expectations are likely to be lower for many companies moving forward and we could see a pull back in the short term.
So even while the long-term outlook is beginning to look more promising, we do have a few hurdles to clear before we get there.
The Recent Market Bounce
Since October the market has seen a pretty good pop in performance.
We are off the market lows for the year, and this looks to be the beginning of the next bull market.
One consequence of this is that some investors may have a more optimistic outlook on the economy.
The price to earnings ratio for the S&P 500 is roughly 17, which is higher than its long-term average of 15. This suggests the market is still relatively expensive given the recent contraction.
The recent market performance is a big contributor it this.
My fear is that if earnings do come in lower than expected we could give back much of the recent gains before pushing towards new highs.
A lot is riding on the next three months. But over the long term the economy is heading in the right direction.
How Should You Invest?
Remember to focus on the long term when you make your investment decisions.
It is easy to fall into the trap of trying to time the market and invest once you feel more certain. But that is a surefire trap to go against you. If not this time, then the next.
Remember your long-term goals and keep it that simple.
Do not change your entire investment plan for three months. Over the long run, which is all that matters, the next three months will be a blip on the radar.
Regardless of which way the market goals.
How are you investing over the next three months?