ST. LOUIS — Normally, higher corporate earnings drive stock prices higher. That’s not what happened in the first quarter, according to money managers at Argent Capital Management in St. Louis.
This quarter, 81% of companies have reported results so far that have exceeded expectations, considerably higher than the 60% average. "Naturally then, you would expect these stocks to rise. That, however, has not been the case," Ken Crawford, Argent's large-cap portfolio manager, wrote on the company's website last week. Instead, "they have fallen on average 0.01% the day they released results. Odd outcome indeed."
"They're putting up just blow-out numbers," said Ward Brown, chairman of the Argent investment committee. "Historically, stocks with results like that surge on the news."
In contrast, companies reported awful earnings at this time last year, as the pandemic took hold, yet stocks rose. What gives?
"Interestingly, both responses make sense," Brown said.
Last year, investors knew earnings would be bad because of the pandemic but would bounce back once it ended. "This year everyone had a pretty good idea earnings would be extraordinary," he said. In other words, investors didn't get too pessimistic last year or too optimistic this year.
Crawford said other reasons include the market's long, strong run.
"Remember, from March of last year to March of this year, the S&P 500 Index rose over 55%. That’s a huge move for mature U.S.-based stocks," he said. A lot of the good news that has been reported this quarter was priced into the stocks.
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