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Earnings Tide Lifts Most Stocks -- Update

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11/03/2019 | 04:13pm EST

By Michael Wursthorn

Earnings are making their biggest splash in the stock market in years.

Investors are sharply bidding up the shares of companies that beat earnings expectations -- and appear more willing to overlook some of the misses -- helping to pull the stock market out of its recent lull. The S&P 500 set three record closes last week, its first new highs since July.

Shares of companies that topped analysts' forecasts rose an average of 2% in the two days after reporting results, beating the five-year average of 1%, according to data compiled by FactSet. Those that fell short have averaged a 2.1% pullback, below the half-decade average of 2.6%.

So far, the winners are outpacing the losers. More than three-quarters of the 358 companies in the index that reported through Friday have beaten estimates, according to FactSet's data. And 66% of companies that reported have risen in subsequent trading sessions, a five-year high.

Nuts and bolts distributor Fastenal Co., motorcycle maker Harley-Davidson Inc. and chip maker Intel Corp. and dozens of other companies have topped estimates and enjoyed a subsequent rally in their shares. Shares of several companies that missed forecasts, including trade-sensitive stocks such as Caterpillar Inc. and Freeport-McMoRan, also rose.

The big crowd of winners has helped widen the breath of the stock market's rally. Technology stocks have continued to drive most of the recent gains, according to S&P Dow Jones Indices, but the contributions of industrial stocks, financials and health-care companies have increased as well.

The S&P 500 has risen 4.3% over the past month, extending its gains for the year to 22%. The index's advance-decline line, a barometer of its breadth that measures the net companies rising each day since the start of the year, climbed steadily in October, signaling solid participation among the sectors in the index.

"We're seeing little rallies in some of the growth segments and other parts of the market," said James Ragan, D.A. Davidson's director of wealth-management research. "Expectations were low for some of the sectors exposed to the overall economy and trade. Some of those fears have really subsided, creating a good quarter."

The upbeat reactions are due in large part to investors getting a more positive picture of American corporations' health than that painted by analysts in the months leading up to third-quarter-reporting season.

Meanwhile, other sources of investor concern, including U.S.-China trade tensions, the U.K.'s long-running divorce from the European Union and the possibility of a recession, have eased. Also, last week, the Federal Reserve cut interest rates for the third time this year and signaled it intended to keep rates low for the foreseeable future.

"Investors are feeling pretty good and better than they did just a few months ago," Mark Stoeckle, chief executive and senior portfolio manager of Adams Funds, said. "Trade isn't likely to get worse in the near term, the Fed just lowered rates and, on balance, earnings are pretty good. The market is almost calling a bottom on some of this."

Mr. Stoeckle said his equity fund used the glut of stronger-than-expected earnings and improved macroeconomic backdrop to buy more shares of companies it already owns. Microsoft Corp., Facebook Inc. and Lam Research Corp. are among the holdings of Mr. Stoeckle's equity fund.

Several stocks in the materials sector that usually attract little fanfare, such as Sherwin-Williams Co., are also among Mr. Stoeckle's strongest performers.

"Investors don't spend a lot of time there," Mr. Stoeckle said. "But we've made a lot of money in materials."

More than 80 companies in the S&P 500 are scheduled to report earnings this week and analysts don't expect the pace of beats to slow. But whether stocks can continue to capitalize largely depends on how the U.S. and China proceed with trade negotiations and whether data continue to suggest the U.S. economy is on solid footing.

Two important pieces of economic data are due this week: October's gauge of the U.S. services sector Tuesday, followed by November's consumer-sentiment survey Friday.

Any signs of cracks on trade or the economy could derail gains among stocks, especially those most exposed to U.S.-China trade tensions and the global economy, analysts said. On Thursday, for example, the S&P 500 fell 0.3%, pulling back from the previous day's record, after a report said Chinese officials doubted they could reach a trade deal with President Trump.

Those developments dulled a rally in shares of Facebook and Starbucks Corp. after the two reported solid earnings a day earlier. Facebook rose just 1.8% despite opening up more than 4%, while shares of Starbucks ended the day up 0.4% after rising 3.6% earlier in the session.

"Investors are still underestimating the negativity on trade," said Ron Temple, head of U.S. equities and co-head of multiasset investing at Lazard Asset Management. "Stocks can move quickly on trade."

The absence of any major geopolitical flare-ups over the past several weeks contributed to the gains several companies scored post-earnings.

Shares of Fastenal, for example, jumped 17% on Oct. 11, their biggest gain in a single trading session in 32 years, after the maker of industrial equipment surprised analysts and investors with stronger-than-expected earnings. Although the manufacturer has been coping with tariffs for more than a year, shares are now up 40% in 2019, with nearly half of that gain coming in the past month.

Harley-Davidson rose 8% on Oct. 22 after the motorcycle maker topped earnings forecasts, its strongest advance in about three years, despite revenue and earnings weakening from a year earlier. The company has shifted some of its production to dull the impact of tariffs and shares are up 14% for the year.

"When you have a concern about where growth is going to come from or uncertainty out there regarding trade, investors like when these companies beat results," said D.A. Davidson's Mr. Ragan.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL 1.22% 28015.06 Delayed Quote.20.09%
DOLLAR GENERAL CORPORATION -0.25% 154.72 Delayed Quote.43.15%
FACEBOOK 0.85% 201.05 Delayed Quote.53.37%
FASTENAL COMPANY 1.87% 35.94 Delayed Quote.37.46%
HARLEY-DAVIDSON 2.87% 36.91 Delayed Quote.8.18%
HUDSON'S BAY COMPANY -0.98% 9.13 Delayed Quote.25.24%
INTEL CORPORATION 1.30% 56.81 Delayed Quote.19.50%
KOHL'S CORPORATION 0.15% 47.15 Delayed Quote.-28.93%
LAM RESEARCH CORPORATION 1.90% 269.86 Delayed Quote.98.18%
LONDON COFFEE -1.07% 1765 End-of-day quote.0.00%
MICROSOFT CORPORATION 1.21% 151.75 Delayed Quote.49.40%
NASDAQ 100 1.07% 8397.367217 Delayed Quote.32.66%
NASDAQ COMP. 1.00% 8656.528802 Delayed Quote.30.46%
S&P 500 0.91% 3145.91 Delayed Quote.25.49%
STARBUCKS CORPORATION 2.21% 86.32 Delayed Quote.34.04%
THE SHERWIN-WILLIAMS COMPANY 1.06% 578.54 Delayed Quote.47.04%
UNITED PARCEL SERVICE 2.19% 117.53 Delayed Quote.20.51%
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