What you should know about volatility, earnings and valuations

Recent earnings misses have rattled the markets—but the story may not be so much about consumers as about the companies that serve them Earnings, Volatility, and Valuations – What Investors Need to Know Earnings season is underway, and some high-profile misses in the retail sector arguably drove a fresh wave of volatility in the stock market. According to our colleagues at Zacks Investment Research1, multiple factors were at play in these earnings misses: merchandising missteps, failing to read evolving consumer behavior, and a failure to fully factor the effect of rising costs. In other words, it’s not necessarily the consumer that had a weak Q1 – just the companies serving them. Indeed, in a survey conducted last fall by the Federal Reserve, Americans reported the highest level of financial well-being in 10 years, boosted by a strong jobs market with rising wages. Higher inflation and particularly rising food and gas prices likely dented this position in Q1 2022, but not so much that consumers are all of a sudden financially vulnerable. JP Morgan Chase reported last week that they expect credit losses to remain uncharacteristically low through 2023, and they are reporting strong cash balances among bank customers.2 --------------------------------------------------------------- [How to Navigate this Volatile Market]( In times like this when market volatility is constant and recession fears saturate the media, it is important not to let emotions cause you to make knee-jerk responses. Instead, I recommend that investors prepare for more volatility and sudden changes in the market. To better prepare, I am offering all readers our just-released Stock Market Outlook report, which contains some of our key forecasts to consider such as: - U.S. Macro Outlook - What fundamentals are U.S. stock markets pricing in with ‘22 and ‘23? - What of U.S. GDP Growth? - Zacks forecasts for the remainder of the year - Zacks rank S&P 500 sector picks - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT'S FREE. Download the Just-Released June 2022 Stock Market Outlook3]( --------------------------------------------------------------- Zooming out and looking at the Q1 earnings season as a whole, the total S&P 500 earnings are expected to be up +9.6% on +13.5% higher revenues. Companies are dealing with a challenging pricing environment and higher input and labor costs, but earnings are still going up. It’s also true that while the earnings picture has shifted around quite a bit in Q1 because of rising inflation, the war, and lockdowns in China, overall earnings growth estimates for Q2 2022 have not changed all that much. As you can see in the chart below, earnings estimates for Q2 are actually higher today than they were at the start of the year, and they have settled at levels that were being forecast in early April: To be perfectly fair, however, a good portion of overall earnings strength is coming from the Energy sector. The Q2 earnings estimates for the Zacks Energy sector have increased a staggering +78.5% since the start of January, and +41.7% since the beginning of April. And with an expected $49.9 billion in earnings in Q2, that would mark year-over-year earnings growth of +178.8%. The sector’s full year earnings outlook is even more impressive, with the current aggregate earnings estimate of $182.3 billion, up +107.8% over 2021, and it has increased by an impressive +66.3% since the start of the year. But it’s not just Energy that is doing well in the current environment. We are also seeing nicely positive earnings revisions in Transportation, Basic Materials, Construction, Consumer Staples, and Autos. It is clear, in my view, that some areas of the economy are thriving with strong consumer demand and the benefits of pricing power, while other sectors are still trying to make adjustments to account for higher costs and shifting consumer behavior. Because again, it’s not necessarily the consumer that’s in a tough spot – it’s companies trying to figure out how to efficiently meet demand and grow profits in the process. Bottom Line for Investors The earnings picture is shifting, but I am not seeing the glaring issues that seem to be reported daily in the financial media. In Q1, approximately 77% of S&P 500 companies reported a positive earnings-per-share surprise, which is very much in line with longer-term averages. And yet, companies that were surprised by the upside saw their shares decline in the two days following their earnings release, which is the opposite of what has happened historically. All told, the selling pressure amidst growing earnings has led to the S&P 500 having a forward 12-month P/E ratio of 16.4x, which is lower than the 10-year average. 4 As a reminder to readers, no one can know when the market correction will run its course. Corrections (which I still believe this market action represents) can last weeks or months, with rallies giving way to sell-offs and the market often looks like it has no clear direction. But one thing we do know is that equity investors with goals of growth do not want to be on the sidelines when the correction does indeed end. Since 1974, the S&P 500 has jumped an average of +8% one month after a correction bottom, and more than +24% a year after a correction bottom.5 In the meantime, I recommend that investors try and remain calm and focus on research and data to help protect their investments while the market is down. Try not to worry and exit the market out of fear! To help guide you, I am offering all readers our [just-released Stock Market Outlook Report]( to help you better prepare your investments during this difficult time. This report contains some of our key forecasts to consider such as: - U.S. Macro Outlook - What fundamentals are U.S. stock markets pricing in with ‘22 and ‘23? - What of U.S. GDP Growth? - Zacks forecasts for the remainder of the year - Zacks rank S&P 500 sector picks - And much more If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [IT'S FREE. Download the Just-Released June 2022 Stock Market Outlook6]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. [Let's Set Up a Talk]( Don't put off planning your secure, happy retirement! Get started today by talking to a Zacks Wealth Advisor. © Zacks Investment Management | [Privacy Policy]( 1[Zacks.com. May 20, 2022.]( 2[Wall Street Journal. May 23, 2022.]( 3Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion. 4[Zacks.com. May 20, 2022.]( 5[Charles Schwab. 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