Earnings Are Up. Why Aren't Stocks?

Summary

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WSJ Your Money Briefing

Episode: "Earnings Are Up. Why Aren't Stocks?"

Date: May 1, 2018
Host: J.R. Whalen
Guest: Charlie Grant, WSJ Heard on the Street Columnist

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Episode Overview

This episode delves into the perplexing question: If corporate earnings are up across the board, why aren’t stocks soaring? J.R. Whalen speaks with Wall Street Journal columnist Charlie Grant about the underlying dynamics of the stock market during a period of strong earnings growth, with a particular focus on the aftermath of tax reform, forward-looking investor sentiment, and how the benefits of recent financial gains may have already been “priced in.”

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Key Discussion Points & Insights

1. Strong Earnings, Weak Stock Performance

• Earnings Season Overview (02:33):
  • Approximately 80% of companies have met or beaten analyst expectations for earnings per share.
  • Many companies are reporting over 20% earnings growth compared to previous periods.
• Stock Market Reaction:
  • Despite stellar earnings, the S&P 500 is flat for the year ("all this good news in aggregate is doing absolutely nothing to push stocks higher" – Charlie Grant, 02:55).

2. The 'Priced-In' Phenomenon and Forward Looking Markets

• Tax Reform’s Impact (03:08):
  • Much of the earnings growth is attributed to recent tax cuts. Investors anticipated these benefits when tax reform passed, and stocks "were surging all through last year" (03:15).
  • Consequently, investors have already ‘been paid’ in advance for this quarter’s good news.
• Future Expectations:
  • "What you're seeing is stock prices having already anticipated this news and right now that good news has pushed stocks up as far as they'll go." – Charlie Grant (03:23)
  • The market is forward-looking and currently craves a new catalyst rather than more of the same.

3. Role of Lower Tax Rates and Their Limitations

• Tax Rate Examples (03:54):
  • Alphabet’s (Google’s parent) effective tax rate dropped to 11% from 20% a year earlier.
  • AbbVie booked a mere 7% effective tax rate for the quarter.
• Limits to Further Growth:
  • "When you get this low, it raises the question of how much lower rates can go. And if they can't, that takes a source of future growth off the table, actually." – Charlie Grant (04:30)

4. Investor Uncertainty over Corporate Spending

• Mystery around Use of Savings (04:36):
  • While many companies are announcing dividends and share buybacks, there’s some uncertainty about how these tax savings will be used throughout the year.
  • If companies shift to capital expenditure (new equipment, reinvestment), it might help future growth or unexpectedly dampen investor enthusiasm if not seen as immediately shareholder-friendly.

5. No Impending Sell-off… But a Need for New Catalysts

• Charlie Grant’s Outlook (05:28):
  • He does not foresee a sell-off but believes stocks “need a new piece of good news beyond tax reform to move them higher.”
  • "I'm certainly not ruling out something emerges that gets investors excited again. I just think we need to hear a new song." – Charlie Grant (05:36)
  • J.R. Whalen: "So the tax song has been played." (05:45)
  • Charlie Grant: "Yes. We need a new chart topper, I think." (05:51)

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Notable Quotes & Memorable Moments

• On flat markets despite strong earnings:
  "All this good news in aggregate is doing absolutely nothing to push stocks higher."
  — Charlie Grant (02:55)
• On why stocks aren't climbing:
  "Investors have been paid in advance for this quarter already ... I think what you're seeing is stock prices having already anticipated this news."
  — Charlie Grant (03:15, 03:23)
• On the limits of further tax reduction:
  "When you get this low, it raises the question of how much lower rates can go. And if they can't, that takes a source of future growth off the table, actually."
  — Charlie Grant (04:30)
• On investor sentiment and future catalysts:
  "Stocks are going to need a new piece of good news beyond tax reform to move them higher ... I just think we need to hear a new song."
  — Charlie Grant (05:28, 05:36)
• On tired narratives:
  "So the tax song has been played."
  — J.R. Whalen (05:45)

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Timestamps for Important Segments

• 02:33: Overview of earnings season and market reaction
• 03:00–03:23: Discussion of forward-looking markets and how tax reform was “priced in”
• 03:54–04:30: Specifics on corporate tax rates and limits to further gains
• 04:36–05:13: Conversation on how companies might spend tax windfalls and investor uncertainty
• 05:28–05:53: Outlook for the market and the need for new catalysts

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Conclusion

The episode adeptly dissects the paradox of strong corporate earnings coinciding with flat stock performance, focusing on how market anticipation, the impact of recent tax reforms, and investor hopes for fresh growth drivers shape today’s stock market sentiment. Listeners learn why "more of the same" news isn't enough and what might be needed to lift the market next.

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Transcript

[Commercial Announcer]

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[J.R. Whalen]

MONEY in MARKET stories from the Wall street journal. I'm J.R. whalen in New York. It's been a stellar earnings season, but why aren't stocks flying high? We'll have answers in a moment, but first, these money headlines. While many of America's biggest retailers have been slashing staff even faster than they have been closing stores mainly as a result of competition from Amazon, it's left them with fewer clerks and longer checkout lines at remaining locations. Well, now some retailers are discovering they may have gone too far and are beginning to replenish staff just as the booming US Economy is creating historic labor shortages and forcing companies to pay higher wages and offer perks. Such as such as better training and benefits. And with 4.1 U.S. unemployment rate and Federal Reserve officials forecasting 3.6% by next year, that'd be the lowest in half a century. Civic leaders throughout the country are asking themselves, why not pay people to move here? The idea has spread where a strong economy, an aging population and an exodus of younger workers have triggered severe labor shortages, often places with very low unemployment rates and higher than average wage growth. That's why small towns across America, instead of offering incentives to employers, are giving it to workers one by one. In the Manhattan townhouse, owned for decades by the family of Malcolm Forbes, the late chairman and editor in chief of Forbes magazine is returning to the market for $28.5 million after a major renovation. The Greek Revival townhouse is located around the corner from the former Forbes headquarters along New York's Fifth Avenue. Forbes died in 1990 at age 70. He was known for his lavish lifestyle and for broadening the influence of the magazine his family founded in 1917. He bought the townhouse in the early 60s and used it purely for entertaining and hosting visiting celebrities and dignitaries. This is your Money briefing from the Wall Street Journal. Welcome back, everybody. Is there such a thing as too much good news? Well, that might be the case as it relates to US Companies delivering news to their investors. And Wall Street Journal heard on the street columnist Charlie Grant is here with some details. So, Charlie, we're in the midst of a particularly strong earning I wish I could coin the phrase happy days are here again, but somebody already beat me to that. But you point out in your column amid the upbeat news, stocks are not really feeling all the love.

[Charlie Grant]

It's been a great Earnings season. By most measures, about 80% of companies have hit analyst estimates for earnings per share or beaten them. On average, those companies are reporting earnings growth north of 20%. Which is. Sounds great, right? Exactly. The thing though is that the s and P500 is basically flat so far this year. So all this good news in aggregate is doing absolutely nothing to push stocks higher.

[J.R. Whalen]

That's a lot because stocks are more forward looking. And as far as Wall Street's concerned, maybe the future isn't as rosy as it is right now.

[Charlie Grant]

Yeah, well, the way I would look at it is that investors have been paid in advance for this quarter already. So when tax reform was passed, investors expected a big bump in earnings. And we've seen that in the first quarter since the new tax law took effect. And all that is great. And as you'll recall, the stock market was surging all through last year. And so I think what you're seeing is stock prices having already anticipated this news and right now that good news has pushed stocks up as far as they'll go.

[J.R. Whalen]

Some of this has to do with lower tax rates, which many companies achieve by booking profits overseas. How can that cloud the crystal ball?

[Charlie Grant]

Well, lowering your tax rate to grow earnings, you can sell more stuff, you can cut expenses, or you can keep more of your pre tax earnings and turn that into after tax income. When tax rates are as low as we're starting to see. Alphabet booked an 11% effective tax rate. Google's parent was 20% a year ago. AbbVie booked a tax rate of just 7% in this quarter.

[J.R. Whalen]

A nice tidy sum.

[Charlie Grant]

Yes, yes, I wish, I wish I could pay that. But they said that tax rate is going to creep higher over the next few years. But when you get this low, it raises the question of how much lower rates can go. And if they can't, that takes a source of future growth off the table, actually.

[J.R. Whalen]

And it's not certain how those companies might spend those tax savings. And Wall street does not like mystery.

[Commercial Announcer]

No.

[Charlie Grant]

Well, I mean, most companies have communicated large dividends, share buybacks, returning money back into the pockets of investors, which is what investors want to hear. It's possible though, as the year progresses, CFOs use more of that money on capital expenditures, new equipment, that sort of thing, reinvesting in the business, which in certain cases might push stocks higher. But in certain cases that might be a nasty surprise and actually dampen investor enthusiasm.

[J.R. Whalen]

To be sure, even though The S&P 500 is flat so far this year, as you pointed out, because investors and shareholders have been paid so far. You're not suggesting in your column that this is all leading up to any kind of an impending selloff?

[Charlie Grant]

No, definitely not. The way I would think about it is that stocks are going to need a new piece of good news beyond tax reform to move them higher. I'm certainly not ruling out that something emerges that gets investors excited again. I just think we need to hear a new song.

[J.R. Whalen]

Okay. So the tax song has been played.

[Charlie Grant]

Yes.

[J.R. Whalen]

It's in everyone's mind and they're tired of it.

[Charlie Grant]

Yes. Yes. We need a new chart topper, I think.

[J.R. Whalen]

All right. We'll watch the top 40 charts and keep our feet on the ground and reaching for the stars that is hurt on the Street. Columnist Charlie Grant joining us here in our studio. Charlie, thanks for being with us.

[Charlie Grant]

Thanks for having me. Take care.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Commercial Announcer]

Deal replaces fragmented payroll vendors with one global system. No third parties. Hire, manage and Pay teams in 150 plus countries. Operate like a local everywhere. Visit deel.com ws.