Earnings Apocalypse Fails to Materialize

Once again, investors in some corners of the market were bracing for an earnings Apocalypse. Once again, fears were exaggerated.

Why? I think I can point to a couple of reasons.

First, analysts have historically been too conservative with their forecasts for corporate earnings. Q1 was no exception.

Second, we’re not in a recession… at least not yet. Fortune 500 companies are huge. Sure, they can execute well and expand their reach. But they aren’t immune to missteps. If they fail to execute, it can be reflected in sales and profits.

But because they are so big, most aren’t immune to the tailwinds and headwinds that an economic expansion or recession will bring. If folks are spending, they benefit. If folks are stingy, they feel the pain.

Earnings for S&P 500 firms will likely end up falling less than 1%. On an absolute basis, it’s not impressive. But analysts had been expecting profits to decline by over 5%.

In other words, it’s a beat, and on average, most companies are beating by a wider-than-historical margin.

It boils down to modest overall economic growth and an easy-to-clear hurdle.

Navigating Fear

“Markets can remain irrational longer than you can remain solvent.”

That observation came from the late economist John Maynard Keynes. Today, it’s fear, not the fundamentals, that are driving short-term sentiment.

Silicon Valley Bank and Signature failed, and the government stepped in to guarantee all deposits of the two banks. And, the Fed implemented a new lending program. Crisis solved.

Advance to late April.

First Republic says it lost a substantial number of deposits since the beginning of the year. The FDIC steps in and sells the deposits and most assets to JPMorgan. “This part of the crisis is over,” JPMorgan CEO says.

Well, not so fast.

Analysts are now warning that regional bank stocks are stuck in a negative feedback loop. The fundamentals don’t seem to matter. Fear and sentiment do. Following First Republic’s demise, short sellers and the market eye their next target, which right now is California-based PacWest Bancorp.

“Markets can remain irrational longer than you can remain solvent.” It’s just one more reason why a well-crafted diversified investment portfolio tailored to your long-term goals can help you manage short-term volatility.