A key factor underpinning the US stock market is the strength in corporate earnings. According to data provider FactSet, 92% of S&P 500 companies have reported 3Q2021 earnings up to Nov 12, of which 81% have beaten market expectations on profits. Significantly, net margin for the quarter now stands at 12.9%, on average, the second highest since FactSet started tracking the metric in 2008. The highest was recorded in 2Q2021 at 13.1%.
There is plenty to worry about in equity markets, and the primary concern is inflation. US inflation in October came in at 6.2% year on year, the highest in 31 years. Rising prices are evident across a broad range of goods and services, not just in the US but also in many other countries. Prices of energy and commodities such as agriculture are set mostly by world markets, and disruptions in supply chains and logistics are happening on a global scale.
Inflation typically eats into purchasing power and has a dampening effect on consumer spending. It also forces central banks to tighten monetary policy faster and sooner than expected, which would hurt the economic growth outlook. All these reasons make it easy to be bearish on the market — particularly given current valuations, which are higher than the historical average — to call for an imminent and material correction or worse. Yet, US stocks have not only remained broadly resilient, but all three bellwether indices — the Dow Jones Industrial Average, Standard & Poor’s 500 and Nasdaq Composite — are hovering near all-time highs.
