[Charts] Lies, Damned Lies, and Inflation

Lou Basenese

Friday, August 13, 2021

It’s Friday in the Trend Trader Daily Nation.

And for the newbies in our midst, here’s what that means:

Every Friday, I curate a handful of graphics to convey some important investment insights.

All it takes is a quick glance — and you’ll be up to speed and poised to profit.

In this week’s edition, we’re diving into the No. 1 driver of stock prices over the long-term: earnings!

So if you’re a skeptic who thinks this bull market can’t last, prepare to be convinced otherwise.

No Signs of Inflation… Yet

If Sir Issac Newton had come up with a fourth law of motion, it would have been this:

A stock in motion higher will stay in motion higher, as long as earnings keep increasing.

Or as I put it a bit more elegantly: stock prices ultimately follow earnings. 

And guess what? Earnings keep climbing!

In fact, as you can see below, since the Great Recession, profit margins have never been higher. 

(click image to enlarge)

I know you’re hearing an earful about the looming threat of inflation. But based on this data, it’s nowhere in sight. 

Beat It!

Now, it could be that price hikes (i.e., inflation) are being completely passed onto consumers. And wage increases have yet to be baked into corporate results.

But if that were the case, companies wouldn’t be so optimistic about the future. And there’s no mistaking their enthusiasm for what lies ahead.

In fact, they’re so upbeat that silly sell-side analysts can’t even keep up!

Look no further than the percentage of S&P 500 companies that are beating earnings expectations, beating revenue expectations, and raising future guidance.

All three metrics are on the rise!

(click image to enlarge)

Companies that announce all three are often called “triple-play” stocks. And history shows they outperform the overall market by the widest margin.

Why? Because stock prices ultimately follow earnings, and these companies typically have the most aggressive earnings growth.

Hint: I wouldn’t buy a single stock in the S&P 500 unless it’s currently a triple-play.

And speaking of outperformance...

Bet on Tech… Always

As a self-confessed technophile, I’m always biased towards tech investments. But it’s justified because we’re living in the Era of Tech-Biquity. And, of course, because the data backs me up.

You see, the “beat rates” for tech companies check-in noticeably higher than for the overall market. Ditto for raising guidance.

(click image to enlarge)

This has been the case for the last decade or so. And guess what? The tech sector has outperformed accordingly.

In fact, according to an analysis by Bespoke Investment Group, the Technology Select Sector SPDR Fund (XLK) topped the performance charts for S&P 500 sector ETFs, rising an average of 22.36% per year.

So when I say, “Always bet on tech stocks,” I mean it.

Past performance might not guarantee future results. But it sure as hell is a reliable indicator.

Ahead of the tape,
Lou Basenese
Lou Basenese


Tags: Technology S&p 500

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