So far, the latest earnings season in the US has seen the majority of companies — 82% of the 37% of companies on the Standard & Poor’s 500 index that have reported, according to data provider FactSet — beating analyst estimates, and by a wider-than-average margin. At this pace, earnings decline for 2020 will be only around 12%, far better than the more-than-20% contraction forecast during the worst of the Covid-19 pandemic fears last year. Sectors reporting the most positive surprises include IT, healthcare and financials.
The market is not rewarding many of the earnings beats, however, suggesting that many believe share prices have run ahead of the anticipated earnings recovery. We had previously written about some of the main reasons fuelling the remarkable rally in stocks — including massive liquidity (from stimulus cheques), historic low interest rates (almost free money), zero commission, fractional shares trading and the surge in participation of retail investors.
The confluence of these factors is manifesting in some never-before-seen phenomena, such as the remarkable short squeeze on hedge funds instigated by retail investors banding over the WallStreetBets forum on social media platform Reddit.