As companies continue to realize the effects of corporate tax cuts, an impressive phenomenon persists.
As of last week, when 267 constituents of the S&P 500 had reported earnings, 79.4 percent had beaten analyst estimates — far beyond the 64-percent long-term average and the 75-percent four-quarter average recorded by Reuters.
If the rate is sustained through the rest of the season, including this week’s 143 S&P 500 reports, that would mark at least a 10-year record for cohort beats, according to FactSet data.
What The Street Thinks
But investors don’t seem to care.
The S&P 500 Index has traded as steadily as its components have beaten estimates. The Dow Jones Industrial Average has been similarly stable throughout this earnings season.
Why No Reaction?
The market might be hesitant to read too much into the positive reporting trend.
One deterrent could be the heightened risk of trade wars, which could soon crush manufacturers of targeted goods and their suppliers. Trade wars would drive an increase in consumer prices, which would eat into intended benefits from the tax reform.
Investors might also be pricing in expectations for rate hikes, which render equities less attractive. Rate increases could at the same time press short-term bond yields above long-term yields, creating a rare inverted yield curve that's historically indicative of a coming recession.
Another concern: an apparent lack of reinvestment of tax-related savings into the economy — an assumption at the base of broad, long-term growth projections. Companies appear to be prioritizing stock buybacks and short-term value boosts over strategies for sustainable growth.
6 Global Economic Themes For 2018
A Day Trader's Guide To A Tumultuous Earnings Season