3rd quarter earnings season has arrived just in time to find the stock market desperate for something good to watch. Despite growing earnings (and dividends) all year, the S&P 500 has been rotten posting 3 consecutive losing quarters and a -25% return.

Contagion of fear has spanned the investment globe and asset prices have followed investor confidence levels downwards. There’s always something to be worried about, but it seems rising interest rates, inflation, recession, and war are spooky enough.

We believe that over the long run, the stock market is good at discounting the underlying business earnings:

However, in shorter runs, investor sentiment outweighs the math. Fear of falling prices can easily become a self-fulfilling prophecy as people rush for the exits.

What’s tricky about this year is that company earnings haven’t actually dropped yet. Rather, earnings have been surprisingly good, with several companies reporting earnings beats.

Factset notes that (through 10/21) earnings continued to grow by 1.5 % in the third quarter, and 72% of reporting companies have had a positive EPS (Earnings Per Share) surprise.

Look at some of the earnings snippets:

“JPMorgan reported $3.12 EPS on revenue of $33.5 billion, easily beating estimates.”

“Pepsi beats earnings. North America and global markets each delivered 16% growth.”

“Johnson & Johnson reported $2.55 EPS, beating estimates of $2.49 on revenue of $23.79 Billion.”

If earnings are so great, are stock prices worried about something else?

The simple argument is that a recession is CLEARLY on the horizon based on stock price indicators.

Maybe so, maybe not.

The NBER found that bear markets don’t always precede recessions. Of 26 bear markets since 1929, there were only 15 accompanying recessions.  That 57% score wouldn’t get you Certified Fresh on Rotten Tomatoes, and it’s certainly not something to wager your portfolio on.

We’d encourage you to watch the data, rather than stock prices if you’re making money moves.