In today’s note, we provide an update on how the market is tracking relative to the historical seasonal pattern, give an early read on the earnings season, and highlight that the “average stock” appears poised to outperform as the economy firms.
- We are careful not to over-extrapolate historical tendencies, but the market this year has followed its historical seasonal pattern fairly closely, at least directionally.
- After a choppy summer, we discussed at the end of September that seasonal market trends were set to improve in October, and markets have already risen 5.8% this month.
- Following the strong gains already seen this month, it would be normal to see a short-term digestion period. Still the primary market trend appears higher, and November and December tend to be a positive stretch.
- The rise in markets continues to be supported by fundamentals as the market and forward earnings estimates both reached record highs last week. In fact, on a year-to-date basis, S&P 500 forward earnings estimates are up 30% versus a 21% price change for the overall market.
- With almost 25% of S&P 500 companies having reported so far, companies appear to be managing the many challenges they're facing relatively well – from supply disruptions, wage increases, commodity inflation, to the COVID-19-induced summer economic slowdown.
- The percentage of companies beating analysts’ sales (75%) and earnings (84%) estimates are tracking well above historical averages, as is the earnings beat margin (13%), although each metric is off the record levels seen during recent quarters.
- Corporate operating margins remain resilient despite many challenges. This is a reflection that many companies have pricing power and have become more efficient and productive through the pandemic.
- After trading sideways for the better part of five months, the S&P 500 Equal Weight Index, a proxy for the average stock in the market, recently moved to a record high. We see scope for outperformance given our work that suggests the economy is set up for positive surprises following the summer growth scare.
- As far as risks to the market, Washington policy uncertainty remains elevated and is likely to inject some market volatility, inflation remains sticky, COVID-19 concerns could resurface in the winter, and we are moving past peak policy accommodation. Still, the weight of the evidence in our work suggests the primary market trend remains higher.
To read the publication in its entirety, please select the "Download PDF" button, below.