Markets turned – again.
Markets continue to be volatile. Last week, stocks headed north. Nicholas Jasinski of Barron’s reported the change of direction reflected investors’ desire for the market to finally hit bottom. He may be right, but corporate earnings suggest we are not there yet, according to Bob Pisani of CNBC.
Corporate earnings season is underway. It’s the time when management tells shareholders how their companies performed during the previous quarter. With 20 percent of S&P 500 companies reporting actual results for the three-month period that ended September 30, the blended* earnings growth rate was 1.5 percent. That’s a slower pace of growth than we saw during the previous quarter, but earnings are still growing. The blended net profit margin was 12 percent, which is above the five-year average, reported John Butters of FactSet.
Yields for United States Treasury bonds rose several times last week, too, although they moved a bit lower on Friday. The yield on a two-year U.S. Treasury note was 4.49 percent at week’s end. In fact, yields for many maturities of U.S. Treasuries were above four percent last week.
That’s important for investors who need their savings and investments to deliver income. During the past decade, with bond yields hovering at very low rates, some income investors added higher-risk bonds and dividend stocks to their portfolios to meet their income goals. Now, those investors may be able to find the income they need in investments with less risk – and that could push the stock market lower as investors move money out of stocks and into bonds.
“Stocks are certainly cheaper than they were at the start of the year, when the S&P 500 traded at 21 times forward earnings. It has since seen its multiple contract to less than 16 times [forward earnings]. But relative to bonds, equities are more expensive than at the start of the year,” reported Barron’s. “The equity-risk premium – stocks’ earnings yields minus Treasury yields – is around 3.5% today. It was 4% in January and nearly 7% during the 2007-09 financial crisis,” reported Nicholas Jasinski of Barron’s
An equity risk premium is the additional return an investor receives for taking on the higher risk of investing in stocks.
Last week, major U.S. stock indices finished higher.
*The blended rate combines actual earnings/profits for companies that have reported with consensus estimates for companies that haven’t yet reported.
https://www.barrons.com/articles/stock-market-volatility-51666397996?refsec=the-trader&mod=topics_the-trader (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/10-24-22_Barrons_The%20Stock%20Market%20Had%20a%20Great%20Week_1.pdf)
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* Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
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