Throughout the outbreak, investors bought stocks when American companies released quarterly transcripts. But the road to a winning streak may be coming to an end.
Banks will be the first to report results on July 13, and second-quarter earnings are likely to look strong, with 64% of S & P 500 companies expected to grow, or mark the culmination of the expansion cycle. This has raised fears that the key factors that underpinned the 15-month bull market, from economic prosperity to massive policy support, will lose momentum.
If history is any guide, then the stock market bulls do have reason to worry. Nearly a century of data compiled by Sipp Dow Jones Indices and Bloomberg show that peak profit growth tends to herald the underperformance of the stock market.
A possible slowdown in economic growth, the rapid spread of new crown variants and the prospect of a tapering of monetary stimulus by the Fed have prompted Cumberland Advisors to recently increase the proportion of cash in its portfolio.
"We made it a little more defensive," said David Kotok, chief investment officer of Cumberland. "We want to see an optimistic outcome, but we think the risk is rising."
Signs of economic weakness have unnerved financial markets in recent weeks, causing yields on 10-year Treasuries to fall sharply. At the same time, the halo of economically sensitive stocks such as banks has faded, while stable growth sectors such as technology stocks are favored again.
Earnings growth for S & P 500 companies is expected to decline gradually over the next three quarters after the second-quarter results are announced, as the boost from the stimulus measures diminishes and the base effect of the epidemic recedes. Earnings growth will slow to less than 5% by early next year, according to data compiled by Bloomberg industry research.
Throughout history, the performance of the stock market after the profit peak has often been unsatisfactory. Since 1927, whenever earnings momentum begins to fade, there is a 2/3 chance that the s & p will fall or perform poorly in the next quarter.
