Why the stock market is outperforming the economy: Morning Brief

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Corporate profits look better than expected, the economy looks worse than expected

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During the early days of the coronavirus pandemic, economic and market forecasters were flying blind.

Accelerating numbers of confirmed COVID-19 cases along with sudden lockdowns around the globe made it impossible to estimate with any accuracy the kind of impact economies and businesses would see.

As preliminary March data — which captured the earliest impacts of these lockdowns — started to trickle in, forecasters were quick to slash their expectations. Economists predicted depression-like numbers and the financial market pros predicted earnings would crash.

Now, after two months and many economic and earnings reports later, two narratives have emerged: the U.S. economy as a whole is in worse shape than expected, and the profits of America’s biggest corporations are doing better than expected.

The economy looks worse

Following the releases of April economic numbers, including dismal jobs numbers and disastrous retail numbers, economists revised their forecasts even lower.

On May 12, Goldman Sachs cut its GDP forecasts and while warning the unemployment rate would spike to 25%. The same day Goldman cut its forecasts, Credit Suisse economists made similar cuts while warning “a longer growth slump will outlast fiscal relief.”

BofA economists lowered their GDP estimates last Wednesday, warning that GDP in Q2 would fall at a 40% rate while saying the recession will be “unlike anything we have seen in modern history.”

And just on Friday, JPMorgan economists cut their 2021 GDP forecasts while warning the unemployment rate would stay above 10% through at least the end of the year.

Big companies are doing better

Through Friday, 97% of S&P 500 (^GSPC) companies had announced their Q1 financial results, including many retailers whose quarters went through April.

And these numbers have mostly been better than expected.

“Although aggregate earnings are beating estimates by +2.6%, ex-Financials, earnings are surpassing expectations by +7.1%, with 65% of companies exceeding their lowered projections,” Credit Suisse’s Jonathan Golub wrote on Friday.

To be clear, it looks like earnings per share will have been down by around 14% in Q1. But the takeaway is that analysts were expecting worse.

“Expectations were -10.5% at the end of March, and -25.3% when 1Q reporting season began,” Golub added.

These better-than-expected earnings results help, in part, explain the rebound in the stock market.

The U.S. economy appears to be in worse shape than expected. (AP)
The U.S. economy appears to be in worse shape than expected. (AP)

Bigger companies cash in as their smaller competitors struggle

We’re aware that Corporate America is a part of the U.S. economy, and so these stories aren’t mutually exclusive. Still, these diverging narratives call attention to the fact that big companies have massive advantages in the current environment as everyone else struggles to keep up.

With many small businesses shuttered and tens of millions of Americans workers headed to the unemployment office, government stimulus checks have made their way to big retailers like Amazon and Walmart, which both reported blowout quarterly numbers.

“The stimulus might as well be called the Amazon and Walmart shareholder act,” NYU professor Scott Galloway said to Yahoo Finance. “There are some unintended consequences here. The strong are getting stronger.”

For Galloway, what’s happening in business now was inevitable. “The future doesn’t look any different. It’s just being accelerated faster… After 11 years of a bull economy, a lot of these small businesses quite frankly just shouldn’t be around. And they have to adapt and reshape.”

However, many would contend that it’s unreasonable for all businesses to have prepared a financial buffer for a pandemic that led to an unexpected, fragmented, government-mandated, months-long economic shutdown.

This article was originally published on finance.yahoo.com/news/.

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