The stock market for all its mystery can boil somewhat down to a couple of basic functions.
First, stock prices reflect the value of the corporations for which the stock has been issued. For large part this value will reflect the companies’ profits, or earnings, and the amount the company has taken in from sales of goods and services, aka revenues.
The earnings part of the equation can become complicated by the complexity of each corporation’s business model, but for the most part the concept is pretty straightforward. When a company’s profits go up, the company should be logically be worth more.
The other part of the equation is more esoteric. This component referred to as valuation involves how much current value investors place on a company based on current profits, and more importantly the anticipation of what profits will be in the future.
This more subjective element of stock prices also will reflect investors’ expectations for the overall economy, interest rates and future business trends. For example, the stock of even the most profitable maker of buggy whips would have had a hard time going up after the automobile trend began to emerge.
Right now we are about a third through what is called earnings season on Wall Street. Companies on a daily basis are reporting their first quarter profits and revenues. During this time corporate management teams also offer commentary on the company operations and discuss the prospects for the future in a process called guidance.
I was a bit concerned about earnings season going in; there was really no way sales at many companies weren’t impacted by our polar vortex winter and I have been anxious to see just how much impact had been realized and, more importantly, how our American companies felt about their businesses going forward.
Thus far however, results have been fairly solid. About 65 percent of companies have reported profits exceeding expectations, and 57 percent reported higher than expected sales. These numbers are a little below average but certainly represent an underlying resilience.
More importantly in my opinion is the guidance being provided. A solid majority of corporate management thus far have expressed optimism about the rest of the year.
It’s good to have the harsh winter behind us. Let’s hope the spring thaw is also reflected in our economy as our nascent recovery continues.
Speaking of optimism, I also have an announcement. As many know I have hosted an hour long radio show on 89.1 the Lakeshore, our local public radio channel. Starting in May, the show will be changed into what is intended to be an audio version of this column. We will use this column each week to create a shorter radio segment to be integrated twice per week into the high profile “Morning Addition” and “All Things Considered” NPR programing. I’m excited about this change and hope you tune into The Lakeshore for some quality local radio with your truly.