Stock Market Insights: Better than feared

DR. RICHARD BAKER, AIF®, is the founder of and an executive wealth advisor at Fervent Wealth Management. https://www.facebook.com/Dr.RichardBaker

"I accidentally shaved your head.” My young barber was supposed to use scissors on my head and a No. 5 razor on the sides. Immediately after I sat down, he grabbed the razor and ran it down the middle of my head before I could say a word. My wife was upset, but after a few days, she said, your hair is better than I feared. She could’ve been describing this earnings season.

The earnings reporting season for the first quarter is almost finished, and like the past couple of earnings seasons, companies did much better than expected. There were a lot of positive surprises, and corporate America projected some encouragement.

This is impressive because corporate America did so while facing several difficulties in the first quarter, including a banking crisis, continued high inflation, and weak economic growth. Considering these problems, most analysts predicted earnings to be negative at 6-7%. Thankfully things were much better than expected even during some difficult times; earnings were negative, but negative by less than 2%.

I saw three factors that led to this big upside surprise:

1. The U.S. Economic growth hung in there. First-quarter growth in the gross domestic product (GDP) wasn’t a barn burner by any means, but it was surprisingly positive while American companies prepared for a recession.

2. Companies became more efficient. Fearing a recession, most companies started taking cost-controlling measures. As a result, when the recession didn’t happen in the first quarter, their lower costs led to unexpectedly higher profits.

3. There was also a big revenue surprise. Revenue (sales) went up twice as much as expected. Analysts didn’t seem to consider that higher prices mean more income for some companies.

These positive surprises led companies in the market to increase their earnings projection for 2023. This is a welcome sign of stability.

Of course, there’s plenty to worry about for the rest of the year, such as the debt ceiling, recession, or a Federal Reserve mistake. So we may have more choppiness in the market, but the risk of a huge profit margin decline has dropped considerably.

LPL is still targeting the S&P 500 to end 2023 in the range of 4,300-4,400, which is a minimum of 4% above where it is now. If the Fed lowers interest rates at some point, the market could perform better. I don’t expect a straight line between here and there. We could very possibly have a mild recession and dip in the market before it pops back up by year-end.

My forehead has grown steadily over the last few years, making me a little protective of my remaining hair. It’s been three weeks, and my hair still looks terrible, but like the market, it turned out better than my initial fears. On a related note, I’m looking for a new barber.

Have a blessed week!

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