Key Points

  • Investors are often most uncomfortable when it seems that the stock market isn’t making any sense whether it’s heading up or down. In these uncertain times, it may be comforting to know that the markets are making some sense.

  • We are able to make some sense of global earnings and stock market performance in addition to the pace and success of re-openings and relative stock market performance across countries.

  • While it makes little sense that there would be such a big gap between the market and analyst estimates for the return of dividends, we expect an official announcement by the European Central Bank (ECB) to help make sense of that soon.

While no one is ever really comfortable losing money, we often hear from investors that they are most uncomfortable when it seems that the stock market isn’t making any sense whether it’s heading up or down. In order to help try to make sense of it all, let’s take a look at where the stock market makes sense right now and where it doesn’t.

Making sense of earnings and performance

Corporate earnings are the most important long-term driver of the stock market. Any changes in the outlook for earnings per share (EPS) should be aligned with stock price movements, even in the near-term. While the outlook for earnings has been clouded by the impact of COVID-19, the direction of analysts’ earnings revisions has been closely aligned with stock price movements.

Changes to analysts’ earnings estimates and stock market performance

Source: Charles Schwab, Factset data as of 7/5/2020. Past performance is no guarantee of future results.

Of course, there are many companies with downward revisions to analysts’ earnings estimates in addition to those with upward revisions. That number is a mirror image of the number of companies with upward revisions in the chart above, peaking in early April and then falling steadily.

Although the dollar amount of analysts’ estimates of the next 12 months earnings per share for MSCI World Index companies has been slowly rising over the past month, it’s hard to have a high degree of confidence in the magnitude of earnings, given all the uncertainty. Instead, it is the direction of analysts’ changes which becomes important to the direction of the stock market. A worsening outlook on the pace or sustainability of the global recovery from COVID-19 would likely affect both the outlook for earnings and the stock market.