Stock prices anticipate future corporate earnings
The stock market has had a near vertical ascent for about 18 months. This has surprised many people as there has been no shortage of things to fret about. But the stock market is a forward looking indicator, and it correctly anticipated a sharp recovery in corporate profits.
Many companies haven’t been giving “guidance” to Wall Street analysts for the last year. This is when the company essentially does the analysts’ jobs for them, saying “here’s what we expect the next quarter to look like.”
Absent this information, Wall Street analysts have been too pessimistic and have underestimated corporate profits—massively. The stock market guessed right, as it often does.
The market is still looking towards the future, so what is it saying now?
At the beginning of the year, 2021 estimated earnings per share was $165, now it’s $199. Estimated EPS for 2022 was $192, now it’s up to $218.
Estimates for future earnings are continuing to rise when looking at the next few quarters. We won’t see the same kinds of growth rates in 2022 as we have this year. Instead, we should expect to see more normal growth numbers, closer to the long term trends.
The market rightly anticipated a recovery in earnings, and there’s reason to think it’s right in anticipating further growth from here. That doesn’t mean we can’t have a correction at any time—we can, but profit growth should continue well into next year.