Broker Check

Data Show Continued Growth Despite Dips

| June 10, 2019

There has been a bit of a recent pullback in the stock market, which history (and recent earnings reports) has shown can be a great opportunity for investors.

Let’s start with earnings. This last earnings season brought some surprising results.

First, sales in S&P 500 firms are up 5.9 percent, while net earnings are up 2.2 percent. That’s surprising because analyst consensus had sales growing around 4 percent with negative overall earnings (though readers of this blog know data is the real story, not conjecture).

The fact that firms surpassed sales expectations led to overall gross domestic product (GDP) growth. And from what several indicators show, this growth should continue for the rest of the year. That’s surprising to some, but it’s what we’ve called for all along.

Certainly, stock selloffs are unsettling. And the recent downward activity, along with the plunge at the end of 2018, did cause concern. But when these dips are accompanied by strong earnings reports, rebounds tend to happen.

In other words, the data suggest we’ll recover. The table below from MAPSignals shows stock performance in the weeks following retreats. Without getting technical, it’s clear there’s a lot of green on the table, which indicates a positive return.

But the key to this table is really the bottom line. The average retreat for these stocks was 3.77 percent. But in the six weeks that followed, positive returns more than made up for the dip. So history says stocks will bounce back, and that’s primarily because U.S. companies are still strong.

According to FactSet’s Q1 2019 data, 76 percent of companies beat their earnings estimates, which is well above the five-year average of 72 percent. In terms of revenue, 59 percent of firms beat their estimates, which is equal to the five-year average.

In general, great stocks bounce back higher and faster than regular stocks.

“Buying the dip” is really about buying into the fear the media puts out there. Right now, the data (and logic) say the U.S. is still the best place to be because of its strong economy and strong earnings.

Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.