OmniDivitia Wealth Management, Inc. - ODWM Blog #earningsOmniDivitia Wealth Management, Inc. - ODWM Blog #earningshttps://www.omnidivitia.com/blogs/tag/earningsSun, 12 Apr 2026 15:55:33 -0700http://zoho.com/sites/<![CDATA[The Soft Stuff Matters]]>https://www.omnidivitia.com/blogs/post/the-soft-stuff-matters A thought on your portfolio's "total return."  (If you were told there would be no math today, I apologize in advance.) ]]>

The Magnified Impact of Investor Sentiment

A thought on your portfolio's "total return."  (If you were told there would be no math today, I apologize in advance.) 


Total Return has two parts to it:  appreciation & income.  If  you view owning a stock like you are an owner of a company, you want it to be profitable and have solid cash flow.  That perspective makes it easier to focus on the yield generated in your portfolio (dividends and interest).  However, as an investment, you also consider appreciation, which can be much more speculative, or at least fickle in nature.  


Think of something as simple as the P/E ratio, which is just another way of saying how much you're willing to pay for an investment for every dollar of a company's earnings  It's one representation of investor sentiment.  Why is this important?  Because uncertainty impacts investor sentiment in addition to the potential impact on corporate earnings.


Consider the two investors below.  Let's assume that the S&P 500 is around 6100, and both use research that shows the estimated earnings for the S&P 500 will be $280 over the next 12 months ("forward earnings").  This puts the forward P/E at roughly 21.8.

Photo by Icons8Team on Unsplash

Ryan wants to manage his portfolio risk.

Ryan is 30 years old, is a high earner, and has some additional cash that he would like to invest.  However, he is also concerned that the market is going to come down significantly for a number of reasons, so he doesn't want to invest right now.  Instead, he guesses that the forecasted earnings for the S&P will only reach $260, not $280.  Not only that, but Ryan isn't willing to pay the same amount for those earnings.  He will only invest if the forward P/E ratio reaches 20.  So because of his conservative nature, he doesn't want to invest more in stocks until the market comes down to 5200.  So even earnings estimates go down by about 7%, Ryan needs to see a drop of 14.75% before he feels comfortable and confident that he can get a reasonable return.

Photo by Austin Distel on Unsplash

Austin wants to be more aggressive.

Austin is also 30 years old, is a high earner, and has some additional cash that he would like to invest.  He has some concerns about the current market, but is more optimistic than Ryan.  While he also thinks that forecasted earnings will only be $260, he is still willing to pay $21.80 for every dollar in earnings (P/E ratio of 21.8), so he plans on investing more if the market pulls back to 5668 from 6100 (a decline of 7.08%).

Are you more like Ryan or Austin?

There is no "right" answer.  Math can tell you what you may "need" to do given certain conditions, but are those conditions actually right for you?  This is why the "soft stuff" matters; it helps you understand your investing style when the market gets tough - because it will.  In a world where we talk about love languages & attachment styles, it is just as important to understand what works for you and how you want to move forward - financially speaking, of course.  


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]]>Tue, 25 Mar 2025 17:38:24 -0500<![CDATA[A Lot Can Change in Two Months]]>https://www.omnidivitia.com/blogs/post/a-lot-can-change-in-two-monthsThe outlook for the markets & economy are quite different in August than they were in June.]]>

"It's The Economy, Stupid!"

The last two months have been a roller coaster, to put it mildly. 

  • 6/27 = Biden/Trump Presidential debate
  • 6/30 = S&P 500 ends 1H24 up just shy of 15%.
  • 7/13 = Assassination attempt of former President Trump
  • 7/19 = Crowdstrike cybersecurity crash 
  • 7/21 = Biden pulls out of the Presidential race
  • 7/24 = Kamala Harris becomes the Democratic nominee
  • 7/26 = Paris Olympics begin
  • 8/4 = S&P 500 drops over 6% since the beginning of July
  • 8/11 = Paris Olympics end
  • 8/21 = S&P 500 recovers, gaining about 8% from the 8/4 low, now up just under 17% YTD.
  • 8/23 = Federal Chairman Jerome Powell indicates that rate cuts are on the way.

Despite everything that has occurred, the remainder of the year will still be focused on... (you guessed it)... the economy.

Economy & Markets

Through 6/30/24, the Russell 1000 index, which covers large-cap stocks, was up 14.24%.  Since then, after rising a little further, it dropped approximately 8%, and then recovered to be up about 18.33% as of 8/23/24..  The Federal Reserve's focus has shifted from the fight against inflation to supporting the labor market as recent data points toward a slowdown.  In fact, the Bureau of Labor Statistics recently revised employment downward by 818,000 as of March, possibly meaning that the economy may not be as strong as figures have appeared in recent months.


In August 2022 at Jackson Hole, Fed Chairman Powell famously said "While higher interest rates, slower growth and softer labor market conditions will slow down inflation, they will also bring some pain to businesses and households."  Two years later, at the most recent Federal Reserve retreat, he stated "The time has come for policy to adjust.  The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balancing of risks.  We will do everything we can to support a strong labor market as we make further progress toward price stability.  ...there is good reason to think that the economy will get back to 2 percent inflation while maintaining a strong labor market."  In other words - THE SOFT LANDING.


It's also clear that there is a market rotation away from the large growth stocks that have brought the market along to new highs.  However, overall valuations are still quite high, and there may be a desire for opportunities with more reasonable valuations, or with reduced risk, especially as interest rate cuts may be ahead.

Political Noise through Year End

Joe Biden's decision to drop out of this year's Presidential Election sent a shock wave  throughout the United States.  Recent polls, even with the revised matchup, show that the election will likely be quite close.  Polls by ABC News/FiveThirtyEight.com show the Biden/Trump pairing to be in Trump's favor 43.5% vs 40.2% as of July 21st.  However, as of August 25th, the ticket of Vice President Kamala Harris & Gov. Tim Walz now leads the former President Donald Trump/Senator J.D. Vance ticket by more than 3% (47.2% vs 43.7%).


The political discourse is likely to be loud through the year end.  However, the saying "It's the economy, stupid!" will likely dominate the conversation as November 5th approaches. Candidates' fiscal plans will certainly be scrutinized by both individual voters and the business community, especially with the background of a slowing economic backdrop.


]]>Mon, 26 Aug 2024 06:00:00 -0500<![CDATA[Fundamentals vs. the Fed]]>https://www.omnidivitia.com/blogs/post/fundamentals-vs-the-fedEarnings may be a sign of where markets are heading.]]>

Earnings May Start to Get More Attention

Our focus has been on the Federal Reserve's tightening cycle for some time, and on COVID stimulus prior to that.  A fundamental aspect of investing has gotten lost in the meantime, but it may start to get more attention in the near future - EARNINGS.  At a base level, when we invest in stocks we become equity owners of that company.  Owners want their companies to make money, both as top line revenue, and more importantly, as bottom-line earnings.  It seems that we have lost sight of how important earnings are, especially regarding fundamental valuations.

S&P 500 Forward Earnings Estimates Have Begun to Turn Over

Fed rate increases take time to work through the economy to have an impact.  The first post-COVID increase occurred in March 2022 at 0.25%.  However, S&P 500 forward earnings per share (EPS) estimates did not peak until June, and began to decline in July. I believe that the decline in estimates still has a way to go.  If that turns out to be the case, and if P/E ratios approach historical norms, it could be a bumpy ride for a while. 


This would be a classic example of one of Bob Farrell's Rules of Investing, as I've quoted in previous posts: "Bear markets have three stages - sharp decline, reflexive rebound, and a drawn out fundamental downtrend.

With an increased focus on fundamentals, higher rates, and considering the Fed is still taking money out of circulation, a continued market pullback is certainly possible in 2023.  However, the Fed also understands the tightrope they are walking: slowing down the economy just enough to tame inflation compared to pushing it into recession.  Asset depreciation may be a casualty of their efforts, but only time will tell.

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]]>Tue, 17 Jan 2023 16:00:00 -0600<![CDATA[Identity Crisis]]>https://www.omnidivitia.com/blogs/post/identity-crisisA recap of 2022 and outlook for 2023]]>

Recovery or Bear Market Rally?

4Q22 provided a substantial bounce in the markets as inflation continued to decline from its June peak.  However, the market's performance in 4Q22 was probably premature in terms of being a sustainable recovery. It appears to be a typical bear market rally.


STYLE4Q222022
 Russell 1000 Index 7.24% (19.13%)
 Russell Midcap Index 9.18%(17.32%) 
 Russell 2000 Index6.23%  (20.44%)
 MSCI EAFE Index 17.40%(14.01%) 
 MSCI Emerging Markets Index 9.20%(22.37%) 
 Bloomberg Aggregate Bond Composite Index 1.87%(13.01%) 
 US 90-day Treasury Bill 1.00% 2.01%
Source: https://www.federalreserve.gov/

The Economy Still Has a Way to Go

Investor optimism seemed to increase in 4Q22 since inflation declined to 7.1% from its June peak of 9.1%. However, even with the improvement in CPI, we must remember that it takes time for rate increases to have a tangible impact on the economy. If we assume a 6-12 month lag for rate increases to have an effect, we are just beginning to see the impact on slowing down demand. Remember how aggressively the Federal Reserve Board of Governors has acted in their attempts to tame inflation.  Not only were Fed Funds rates raised by more than 3.50% in the latter half of 2022 in order to slow demand, but the Fed is also slowing the growth of money in circulation, as you can see in this chart. I would not be surprised to see funds being pulled out of circulation to slow demand further to bring inflation to the stated 2% long term rate, especially given the amount of funds that have been put into the economy over the last several years as support for various reasons. 

    

The challenge is how much to press on these economic brakes while making sure the "car" is still moving forward.

There were three times in 2022 when the markets declined more than 10%. Each time, the subsequent recovery failed to meet it's previous high, and the following lows went even lower. I believe we might be in the fourth leg of this cycle since rates will still likely increase in the first three to six months of 2023.


Another concern is valuations. the year-end P/E ratio for the S&P 500 was roughly 16.7, which is only slightly elevated in "normal" times, but quite elevated given the current level of inflation. However, with a backdrop of higher inflation (i.e., increased risk) than historical norms, buyers should be compensated with lower prices. Given the outlook for interest rates, one could easily make the case that the P/E ratio should be even lower.

Pundits seem to be searching for the identity of this economic environment for 2023.  Throughout much of last year, we began to hear the same refrain that is being echoed now. "The Fed is going to have to pivot (to cutting rates) in order to keep the economy from going into recession. To put it nicely, I think it is (and has been) hogwash to take this position when the Fed has told you explicitly what they are going to do and have not deviated from that path. Consider the following quote from Fed Chairman Jerome Powell's speech at the Jackson Hole retreat in August 2022.

 

‌"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."

In the words of Maya Angelou, "When people show you who they are, believe them the first time." 


*Note:  We gathered this information from sources we believe reliable, but do not guarantee its accuracy.
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