Earnings reports for the first quarter of 2021 start rolling in on April 14 with JPMorgan Chase (JPM) and Wells Fargo (WFC) both reporting before the stock market open.
The big question is how much of the huge year over year earnings growth is already in the price of stocks. The Standard & Poor’s 500 hit a new all time record again today, April 9, (intraday) and closed at 4128.80, up 0.77% on the day.
With the stocks in the S&P 500 expected to show year over year earnings growth of 20%, the rally in the S&P 500 doesn’t seem unreasonable. The index is up 9.5% for the year as of the close on April 9.
Normally, I’d expect stocks to give back some of their gains on the actual earnings reports. Expectations are so high for the first quarter and much of that is built into stock prices. So, typically, when companies actually report and issue guidance for the upcoming second quarter, investors and traders would trim positions on the “What are you going to do for me next quarter?” theory.
Not this time, though, in my opinion. As startlingly positive as the year over year earnings growth is going to be in the first quarter, it’s likely to be even more positive in the second quarter. Wall Street is now projecting that year over year earnings growth for the second quarter will come in at 49.7%.
That’s what comparing the first two pandemic recession quarters of 2020 to the first two vaccine recovery quarters to 2021 can do for year over year growth rates.
The likelihood is that lots and lots of companies are going to be announcing strong earnings growth for the first quarter and then guiding to even stronger growth in the second quarter.
How do you position your portfolio for good news on earnings growth in the first quarter and then even more projected good earnings news for the second quarter?
For the last few weeks–well, even the last few months–I’ve been trying to position my online portfolios for this scenario. (Even as I continue to believe that the going could get very rough for stocks sometime in the July to September time frame as worry climbs about when the Federal Reserve will start to cut back on its monetary support for the economy and financial markets.)
So I’ve added first and second quarter earnings growth stocks like Disney (DIS), Wyndham Hotels and Resorts (WH), Build-a-Bear Workshops (BBW), MGM Resorts International (MGM) Dow (DOW), Coca-Cola (KO), PayPal (PYPL) and the Invesco KBW Bank ETF (KBWB) to these portfolios. If you haven’t moved to add first and second quarter earnings growth stocks to your own portfolios, I think you can still make that move in the beginning of next week.
But I don’t want to be in a position of chasing these earning growth stories after the announcements though. The market is already pretty giddy and I expect some overly enthusiastic reactions to the actual and projected earnings growth reports.
You do want to remember that these year to year growth rates are a statistical artifact of the extreme swings in the economy caused by the pandemic recession and recovery. And that earnings and revenue are still working to get back to pre-pandemic levels from 2019 in many industries. And that this market is built, ultimately, on low interest rates and cheap money from the Federal Reserve.
Cheap money is probably here for quite a while yet, but it’s hard to imagine that money is going to get significantly cheaper in the second half of 2021.
