The third quarter earnings season is almost complete. About 100 companies will report this week, which will mostly complete the reporting season. We don’t expect there to be any meaningful moves away from the trends established in the prior weeks. Thus, it looks like we will complete earnings season with positive quarter over quarter earnings growth, marking five consecutive quarters of earnings growth.

Against this earnings backdrop, we’d like to highlight a chart produced by Yardeni Research. Here it is:

This chart shows the relationship between leading economic indicators (dotted green line) to coincident economic indicators (in blue) and forecasted S&P 500 earnings (in red). Historically, when leading eaconomic indicators roll over, it leads to declines in both coincident indicators and forecasted earnings with the exception of today! It appears from the chart that earnings are defying gravity.

We are not saying earnings will roll over. So far, earnings have been very resilient as have coincident indicators. Either the causative linkages are now disconnected or some other force is subsuming the causative linkages. It very well may be that profilgate government spending is driving corporate earnings higher and leading to the disconnect in this relationship. Or it could be that we’ve entered a new AI driven era of productivity, which is driving earnings higher. Whatever the cause, the data demonstrates that SOMETHING is different about this moment in history. With both corporate earnings and valuations moving higher, we are certainly not comfortable. Add to this a picture of leading indicators that are rolling over, and we become even more cautious on this currently ebullient earnings outlook.

We at WealthPlan manage stock portfolios conservatively by emphasizing things like valuations, dividends, and sector diversification. In the event that leading indicators begin to manifest in weakening earnings, we think our portfolios will hold up to peers relatively well if history is any guide. We remain open to the possibility that it may, in fact, be different this time around. But we also can’t help but feel a roll-over in earnings is delayerd but coming. Either way, we remain focused on making sure we hold compelling opportunities with an eye on the valuations of those current holdings. Also, we do offer more defensively-oriented offerings that might be the right solution for you if you are feeling uneasy. In that case, please connect with us and we can talk it over.

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DISCLOSURES

The S&P 500 index covers the 500 largest companies that are in the United States. These companies can vary across various sectors. The S&P 500 is one of the most important indices in the world as it widely tracks how the United States stock market is performing. The S&P 500 has had several major drawdowns that have been greater than 40% during recessionary periods including in 1974, 2002, and 2009.

About The Conference Board Leading Economic Index® (LEI) and Coincident Economic Index® (CEI) for the US

• The composite economic indexes are key elements in an analytic system designed to signal peaks and troughs in the business cycle. Comprised of multiple independent indicators, the indexes are constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component.
• The CEI reflects current economic conditions and is highly correlated with real GDP. The LEI is a predictive tool that anticipates—or “leads”—turning points in the business cycle by around seven months.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.

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