Fri. Dec 3rd, 2021

A strong earnings season has propelled Wall Street equities to new record highs, helping to isolate equity investors from the volatility that has rocked bond markets in recent weeks.

Of the more than 400 companies on the blue-chip S&P 500 index that reported their results by Thursday last week, 81 percent of them earned higher earnings than consensus estimates, according to FactSet data.

Overall, profit among S&P 500 ingredients increased by about 40 percent in the third quarter compared to the same period last year, with sales up about a fifth.

The so-called “beat rate” is lower than the record-breaking first two quarters of the year – when companies were boosted by economic reopening and flattering comparisons to early 2020 – but still on track to hit one of the top five quarters on records be back to 2008.

Bar graph of proportion of S&P 500 ingredients (%) showing that US companies are still performing better than expected

In part, the performance reflects relatively low expectations. Profit warnings in late summer and early fall have meant that some negative news has already been embedded in analysts’ estimates and priced into equities.

While rising costs, however, a general refrain in earnings reports as feared, many companies such as food and beverage makers Mondelez and PepsiCo as well as consumer product company Procter & Gamble said they manage to pass on the cost without suffering much pressure on demand.

Line chart of leading US stock indices, year to date (re-base) showing stock markets rising during the third quarter earnings season

Strong results have helped the S&P 500 set 10 record highs since the end of October, and gains are not limited to a small number of mega-cap stocks; the Russell 2000 Small Business Index also reached a record high last week for the first time since March.

The upbeat performance comes after a more muted end to the third quarter, with the S&P 500 in September achieving its second monthly loss of the year. It is also a stark contrast to fixed-income markets, where many investors have been distorted over the past few weeks by weak bets on central banking policy.

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