This Earnings Season Is One For The Record Books, But I’m Protecting Profits…

I can’t believe it’s already November. Halloween has come and gone, and Thanksgiving is right around the corner. Before you know it, the Christmas decorations will be put away and we’ll be ringing in a New Year.

And just like that, 2021 will be in the history books.

Still, Covid aside, most investors will look back on the year fondly. Of course, we didn’t know that going in.

There were plenty of reasons to be wary. The recovery was still fragile and uneven — and the Delta variant was on the horizon. While the major averages had bounced from their lows, the gains were almost exclusively powered by stay-at-home stocks like Netflix. The rest struggled. In fact, the utilities, real estate, financial, and energy sectors all suffered negative returns in 2020.

It was a bleak time for most value-oriented dividend payers. But I was confident the narrow market rally would broaden. In fact, I told my High-Yield Investing readers, “2021 is shaping up to be a great year for contrarians. Countless strong businesses have been knocked down… and are licking their wounds. But most are already on the mend.”


S&P 500 earnings growth has been nothing short of outstanding lately. More than four-out-of-five (81%) companies produced third-quarter profits that topped expectations. Just a month ago, analysts were forecasting America’s largest business to post average earnings growth of 27%. According to FactSet, the actual growth rate is tracking closer to 39%. If that rate holds, it will be the third-fastest since 2010.

Source: FactSet

I’ve seen stressful times where most of the bottom-line improvements were attributable to cost-cutting. That’s fine (although you can only tighten the belt so much). But that’s not the case here. All eleven sectors have reported year-over-year revenue growth, paced by the energy (+74%) and materials (+32%) groups.

Source: FactSet

Aside from earnings, the market is also relieved that the Federal Reserve hasn’t thrown any curveballs. As expected, Jerome Powell and his cohorts have decided to start gradually weaning the economy off of monetary stimulus – no taper tantrum. Throw in a robust October job report, and you can see why so many investors have been in a buying mood.

Looking Ahead

Remarkably, as I write this, the S&P has now risen to new record highs for eight consecutive sessions. That streak may end soon, but still, it has been a good run – and not just for the tech sector. Many of yesterday’s laggards have become today’s leaders (a welcome rotation).

By my count, there are 11 active triple-digit winners in my High-Yield Investing portfolio, or 13 if we round up a couple of others. Without digging through the issue archives, I would say this marks a new record.

As you might be able to guess by the name, this is not a risky growth advisory or trading service. I don’t bring that up to brag, but rather to simply point out that even for “growth” stocks, 100%+ gains don’t exactly grow on trees. But it pays to run against the herd sometimes, which we certainly did last year. Indiscriminate, panic-driven selloffs can lead to big returns for those who keep their cool.

That being said, pockets of value are becoming increasingly rare. In fact, most of the market is overvalued at this point. The S&P is now trading at 21.4 times forward earnings, well above the 10-year average of 16.4. While crude, this metric does suggest caution.

What would a return to normal historical valuation levels look like? Well, it would take a decline of 8,476 points in the Dow. Ouch.

By itself, that certainly doesn’t mean that a pullback is imminent. The market can get over-extended to the upside just as easily as the downside. However, I think it would be prudent to take some safety measures here and will continue to enter stop losses to protect our gains.

You may want to think about doing the same. Like I said, there’s no reason to panic, but think of it as grabbing a parachute ahead of time. It’s a long way down, and you’ll be glad to have it if it’s needed.

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