Earnings season is now in full force and 55 companies have already reported their third quarter results (11% of the S&P 500). Of these, 85% beat their estimates – and by a median of 9%. We have another 76 companies reporting this week. We reiterated again last week that it is largely earnings that drive stock prices, and indirectly the relative attractiveness of other asset classes in the never-ending search for return relative to risk. Stocks tend to provide the greatest opportunity for capital appreciation, so investors move their money in that direction if they feel that the underlying companies are doing well. How do they judge that? Earnings of course! Companies that are growing and increasing their profits may be deemed safe, and the potential return is worth the risk. Thus, money flows into the shares of those companies and the price of those shares goes up. This phenomenon is what creates what we know as a bull market.
Despite the volatility we have seen over the past two months, including a painful sell-off in September, earnings forecasts have continued to rise. What we have seen over the past week is those forecasts come to fruition. During our monthly advisor webinar last week I suggested that the beginning of earnings season could be the catalyst we needed to break out of the correction we were mired in. That appears to be the case. For those golf fans out there, they call the Saturday of the Masters tournament “moving day” because it is often when players in the running falter and the true contenders emerge. I compare October to moving day in the seasonal stock market. It is often the month when things shake out and we get some clear direction on how the year is going to end, up or down. Moving day isn’t over, but from where I sit today it looks like we are moving on up.
Our commentary is delayed this week because I have been traveling and spending time with my son for Dad’s weekend at the University of Kansas (rock chalk!). I then came up to Minneapolis to work with a few of our advisor partners and preview some tools we have coming out this quarter. While up here, I participated in a podcast with them and attended a meeting with 50 or so of their clients who were in person and another 80 who attended via zoom. The podcast was fun, as was spending time with my partners, but I have to say there is nothing better than getting to sit and be a part of what real people experience in the world of investing and in life. I met great people and learned a lot from listening to their perspective. I am leaving today with new ideas and am prouder than ever of what we try to do every day at Cabana. Getting the opportunity to make a positive difference in a person’s life is an incredible gift. Thank you to the fabulous people of the upper Midwest. Minneapolis is a beautiful city, and I will be back.