Earnings Matter

Tweets. Trade war threats. Rising interest rates. There has been no shortage of market moving news so far in 2018. Coming out of an unnaturally calm 2017, the volatility this year, though admittedly slightly above the long run average, seems to many to be worse than ever.

In the first quarter of 2018, there were four weeks with worse performance than any week of 2017. On the flip side, there were five weeks with better performance than any week last year. In true market fashion, these moves up and down generally happened in back-to-back weeks.

Since we don’t possess a magical, market forecasting crystal ball, the best way to evaluate investments during rocky markets is to focus on the fundamentals. Corporate earnings, as measured by Earnings per Share (EPS), are most closely linked to market moves according to a study by JP Morgan.

Aided in part by the recent tax bill, first quarter earnings in the S&P 500 for 2018 were up more than 17% over the first quarter of 2017 according to FactSet. Encouragingly, revenue also increased year-over-year by more than 7%.

Based on the numbers, and despite the volatility and uncertainty, US economy and the stock market continue to look well positioned for a good 2018.