The expected cycle

We are finishing a new corporate earnings season in the U.S. and more than 94% of S&P 500 companies have already reported. Sales barely grow

(+0.4%) and earnings fall 3.4% in the second quarter.

Obviously, companies earning less than in previous periods is not a good sign; however, when we look at market returns at different points in the

economic cycle, the relationship is not so obvious.

From 1930 to 2021, when earnings rose (year over year), stock markets returned positive 72% of the time. On the other hand, when companies' earnings

fell, stocks rose 77% of the time. This—which may seem counterintuitive—is explained by several factors. First, the market prices in expectations. This quarter an 11.2% drop in earnings was projected, so a decline of more than 3% is a “positive” scenario. In addition, it is concentrated in 3 or 4 sectors (out of 11 total), so no widespread crisis is evident.

Market evolution is unpredictable and only a diversified strategy allows meeting investment objectives. And note, a moderate decline in earnings can even be profitable.