News & Analysis

If the earnings were stellar, why is the stock market slipping?

Andrew Saks, Wednesday, 5 May 2021

Euphoria is an interesting phenomenon and carries an equally interesting pattern of behavior, regardless of its cause.

Yesterday, almost 15 large companies followed the bank and tech firms lead and reported first-quarter numbers, however every single one has beaten Wall Street earnings estimates by more than 30%, yet S&P 500 futures are down by 0.1%.

This was replicated by the FTSE 100 which fell below 7,000 after the bank holiday, demonstrating a situation in that many want to sell, but investors are cautious about buying.

Some speculation from New York is suggesting that the downturn in S&P500 overall values is down to investors rushing to sell stock at their high price, and a reluctance to buy at top of market prices.

Whether it is a contributor to the 'law of diminishing returns' which is as old as the Roman period in which a larger amount of the same activity has to be sustained by hedonists in order to maintain the same gratification, or whether it is something which always fades and allows the subsequent realities to be better assessed is a matter for the philosophers, however today's stock market doldrums are a case in point.

As last week drew to a close and a longer than usual weekend brought a smidgen of sunshine to the British Isles which was enough for long couped-up citizens to stretch their legs and forget the rigours of work in an outdoor setting, the stock market was at an annual high, especially among London-listed prestigious share indices such as the FTSE 100.

The calmness of the market participants last week demonstrated such confidence, especially when several Tier 1 banks unveiled surprising first quarter revenues which, aside from those which were decimated by their involvement in the extremely unpleasant Archegos hedge fund demise, were absolutely astronomical.

Let's face it, a 79% increase in pre-tax profit - not revenue - profit, as reported by HSBC last week is astonishing, especially given the combined exposure that banks now risk because of their lending to failing businesses which were locked down and which many will never repay.

This, combined with the massive highs experienced on the London Stock Exchange, made for many an encouraging observation.

Today, however, the reality check has been delivered, and rather unbelievably the strong earnings seem to be not quite enough to keep the stock market from dipping!

The two sectors which experienced very high earnings worldwide in the first quarter of 2021 were the Tier 1 banks (with the exception of Credit Suisse and Nomura) which represent the aforementioned anomaly, and the technology sector, which is perhaps much less surprising given the massive reliance on internet-based services for over a year by most domestic households.

However, these massive figures appear not to impress the analysts, nor to have been enough to maintain an upward direction in global indices.

This is entirely possible - after all, who knows what this will look like at the end of next quarter when the banks that are currently on cloud nine with massive earnings have to count the cost of defaults on the Bounce Back Loans that are all now due for repayment beginning April this year.

Perhaps there is some merit in the line of thinking that the market cares about earnings but it’s always forward-looking, therefore today’s earnings are yesterday’s stock moves.


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