The S&P 500 posted a gain for the 6th quarter in a row during the three months ended September 30, 2021[i]. The index gained +0.23% for the quarter and is up +14.68% in the first nine months of 2021. Since the March 23, 2020 low, at the height of Covid-19 fears, the index is up +92.52%.
While it was a net gain over the three-month period, the quarter faded near the end with the S&P 500 falling -4.76% in September. The September decline was the first monthly loss for the index since the -1.11% decline in January at the beginning of this year.
Strong earnings influenced the gains in the market as the S&P 500 year-over-year Q3 earnings growth was the second-best (+90.97%) in the past twenty years. This abnormally high rate of growth can be attributed to stimulus, the re-opening of the economy and, due to businesses being closed during the Covid-19 shutdown, companies were beating analysts’ year-over-year earnings and revenue projections with relative ease.
Despite the last three months of the year being historically strong, we are now more cautious about future stock returns. Why? Increasing inflationary pressures and global supply chain disruptions seem to be influencing corporate earnings expectations. Worker shortages are a major reason behind supply chain issues, so companies will likely have to entice workers with higher wages ultimately resulting in higher prices for the things we use daily.
The good news behind this is that demand for goods and services remains strong. This silver lining is a positive, and if this can get figured out in the short run, then maybe our concerns become minor, and expectations of future earnings improve at increasing rates.
Ultimately, we believe companies are adept at managing through difficult times to find ways to improve profits, which is why our long-term view is that owning equities provides an advantage over the long run, and staying close to target allocations makes sense. Given the recent run-up in the stock market, we felt it was prudent to capture gains during this time.
As always, we look forward to our next conversation.
Take a look at our Quarterly Market Review for insights on statistics and trends in domestic and global stock markets.
[i] All return and earnings references provided by The Earnings Scout, LLC