Why Wall Street's 'Wrongs' Are Bullish for Stocks

'Tis the season for earnings reports... Why Wall Street's 'wrongs' are bullish for stocks... A perverse set of rules... Time to think about your flu shot... The annual cost of the flu is in the billions...

It's 'earnings season' again...

The publicly traded companies in the U.S. announce quarterly results throughout the year. And we're about to hit a stretch of reports about how thousands of businesses did in the third quarter of 2021, which ended September 30...

Financial powerhouses JPMorgan Chase (JPM) and BlackRock (BLK) will kick off this earnings season Wednesday morning. Disney (DIS) will wrap up the period when it reports in mid-November.

Companies have 45 days to report results to the Securities and Exchange Commission ("SEC") after the previous quarter ends. We bring up these bookkeeping notes because we'll be watching, though taking the results with a grain of salt... And you'll see why.

We'll be watching mainly to hear and see what companies are saying about rising costs... how long companies expect supply-chain slowdowns to continue... and which companies are effectively passing on higher costs to consumers (i.e., raising prices).

Last month, for instance, in a "preseason" call with investors and analysts, Costco Wholesale (COST) executives said supply-chain and inflation concerns continue to be real for its business, which relies on distributing a large variety of items across the world.

In response, the company is implementing customer buy limits on "essential" items like toilet paper, paper towels, and its Kirkland-brand bottled water. Costco executive Richard Galanti explained why...

From a supply-chain perspective, the factors pressuring supply chains and inflation include port delays, container shortages, COVID disruptions, shortages on various components, raw materials, and ingredients, labor cost pressures, and trucks and driver shortages.

He also said that shipments that traditionally took eight to 12 weeks are now taking 16 to 18 weeks and suggested the trend will likely continue into 2022... shipping costs are up anywhere from double to six times... and the price of paper goods is up between 4% to 8%...

As we've said, rising costs are bad for consumers like you and me (Corey McLaughlin), but they can be good for companies that make in-demand or addictive products that don't see a drop in sales even with higher prices. We'll note which ones they are and how it improves their earnings.

What we'll be paying less attention to is how these companies "perform" compared to Wall Street estimates ‒ "against expectations" is a phrase you will hear repeated ‒ which is what you'll see in mainstream headlines over the next several weeks.

Why? We'll let Stansberry NewsWire editor C. Scott Garliss, who spent 20 years working on Wall Street, explain this "game within the game" of the markets.

When the pandemic hit, Wall Street analysts did not want to make the same mistake they made in 2008 to 2009...

To be clear, when we say "Wall Street analysts" we're using a broad-brush label for the folks that predict earnings expectations for various stocks and sectors. Some are better than others... and have different approaches and expertise.

But generally speaking, as Scott wrote today in his regular morning commentary (available for free), the investment firms that cover stocks have been overly cautious in their predictions about how companies will perform each quarter since the start of the pandemic...

And the source of his behavior, Scott says, dates back to the financial crisis more than a decade ago. He was working on Wall Street back then, and as he wrote today...

Back then, [Wall Street analysts and strategists] were slow to respond. They waited to cut earnings estimates for companies. Those analysts kept waiting for the situation to turn around while it grew worse. And because they waited so long to reduce their estimates, what seemed like relatively cheap price-to-earnings multiples on the S&P 500 suddenly became expensive.

Each time they played catch-up, another market drop ensued. Many of their customers lost faith in them. They also became easy targets for government scorn and media ridicule.

So when the economic lockdowns began last year, they felt like they'd been down this road before. And instead of being stuck behind the curve, this time they decided to get out ahead of it. As a result, those analysts slashed their estimates and outlooks across the board.

In other words, amid this crisis and the recession of 2020, Wall Street got overly cautious...

The street has been chasing the bull run with increasingly rosy predictions ever since March 2020. More from Scott...

Compounding the confusion, they're unsure if last year's growth tailwinds have turned into headwinds. The uncertainty has led analysts to maintain a low bar for earnings season.

Currently, data provider FactSet reports that Wall Street analysts anticipate 27.6% year-over-year earnings growth in the third quarter of 2020.

That's a big jump from the prediction of 24.2% for third-quarter growth made at the end of June, and well above the 18.3% number estimated at the end of March... but it's probably still too low.

Consider that when you see 2021 year-over-year third-quarter numbers, we're talking about annual comparisons versus 2020, when the economy had not yet "reopened," and vaccines hadn't been released to the public.

Wall Street analysts have been more inaccurate than usual lately...

At the start of last quarter, the same analyst community anticipated growth of 64%. When all was said and done, the final number was growth of 90.9%. As Scott wrote...

Suffice it to say, they were a bit low. Over the last five years, the final quarterly earnings-growth number has been higher than Wall Street's estimates by 8.4 percentage points, on average. But over the last five quarters, that number is 19.1 percentage points.

The large-cap banks will be the first to report. The Federal Reserve's announcement in June, which allowed these companies to boost dividends and share buybacks, should be a tailwind for them.

And if more companies "outperform" as earnings season goes on, that will be bullish for U.S. stocks overall. As Scott explained...

If companies become more constructive on their earnings outlooks, suddenly analysts will need to rethink their estimates. If earnings estimates are too low, that suddenly makes multiples of stock indexes cheaper.

And as they become cheaper, stocks grow more attractive in the eyes of investors. That sets off a whole new wave of buying activity, pushing indexes even higher. It's scary when you consider that institutional investors have been raising cash.

This matters because institutional investors account for more than 85% of volume of U.S. stocks, according to Morgan Stanley. So what they think and how they act can have an outsized impact on the performance of stocks.

If it sounds like Wall Street analysts work within a perverse set of rules, they do...

As Scott said, over the last five quarters, Wall Street estimates for earnings growth have been off nearly 20 percentage points... and this is not an unusual performance.

As Retirement Millionaire editor Dr. David "Doc" Eifrig explained recently in our Bull vs. Bear debate...

Did you know that for every calendar year since 2000, Wall Street strategists more or less agreed that the S&P would go up around 10% over the next year?

Meanwhile the actual result turned out to be just 5.5%. That's a 45% mistake. That's a huge margin of error. It would never be accepted in any legitimate scientific or mathematical community.

Worse yet, in 2008 when the market fell more than 38% the median forecast was a bullish 11.1%. We all learned the hard way that their rosy projection was dead wrong.

Where do we begin with how bad this is?

This performance is worse than our local television weather forecasters... and most other people with a job in which they are held accountable for results.

If I had 45% of the words in whatever I wrote spelled incorrectly for the last 20 years, I'd probably not be writing for a living anymore. (I know I'm opening myself up for comments here.)

The bottom line, be wary of Wall Street estimates... As Scott put it, they look like a "low bar" right now that companies should clear with ease in the weeks ahead.

And why does this matter?

According to Scott, this dynamic should boost the S&P 500 Index as we head deeper into the last quarter of the year. Institutional firms will continue to play catch-up in this bull run, as more investors realize they don't want to be left holding the proverbial "bag."

It's hard to quantify precisely what sentiments like this mean in terms of a percentage gain for U.S. stocks, but directionally speaking, this perverse game is bullish.

If that all makes your head spin, don't fret...

This is why it's better to simply focus on doing good research, buy great businesses at good prices, and know why you own something and why you might sell it... rather than worry about what the "experts" on Wall Street are projecting.

Instead, learn how to build your own portfolio for your needs and wants... follow our editors' advice and research... and you'll probably find it easier to rest at night in the long run.

Switching gears completely, we want to share a note from 'Doc' about getting your shot...

The flu shot, that is...

Last week, in his free daily Health & Wealth Bulletin, Doc published a piece titled "Why I'm Getting a Flu Shot."

As Doc wrote, the admission might surprise some readers. For years, he'd argued that flu shots were unsafe and unnecessary. But four years ago, he decided it finally might be time to get one.

It wasn't necessarily because of flu symptoms he might get, but because of an additional benefit from getting the shot. As we'll also share, there is a financial cost of the flu as well. Doc explained why he changed his mind in last Thursday's Health & Wealth Bulletin...

It turns out that folks who regularly get the flu shot lower their risk of a heart attack.

Fighting off influenza stresses your immune system. When you're fighting off the virus, inflammation increases, particularly in your blood vessels.

More and more studies show that increases in inflammation lead to blockages... which ultimately leads to heart attacks or strokes.

What's more, the flu causes your blood vessels to leak fluid, which builds up in your lungs. That fluid may start to grow bacteria, causing deadly infections. It also means you're getting less oxygen into your blood, that in turn puts a strain on your heart.

In 2016, a review from the University of New South Wales, in Australia, found that the flu vaccine can reduce the risk of a heart attack by up to 45%, depending on a person's other risk factors.

A 2018 study published in The New England Journal of Medicine found that for the seven-day period after a flu diagnosis, people were six times more likely to suffer a heart attack... regardless of any present risk factors for heart disease.

Over the long term, the flu vaccine also causes antibodies to flip on a receptor in our heart that reduces inflammation, Doc said. The research is so strong that...

Researchers are now studying different types of flu vaccines to develop a possible vaccine for heart disease. This is really exciting. Regular readers and friends know I've long thought that most diseases we face are infectious. I've been laughed at because of my thoughts about the connection between infection and diseases like heart disease and age-related macular degeneration.

Heart protection aside, the vaccine also offers some protection against getting the flu and most importantly, leads to fewer hospitalizations and deaths from it.

You might still get the flu, but the vaccine will reduce your symptoms and help you avoid the most serious outcomes... Plus, the more people who get the flu shot, the fewer people there are to spread the virus to others.

Add it all up and Doc says consider getting the flu vaccine...

He still advises that if you're a healthy adult – without heart disease risk factors – chances are you don't need the vaccine. He says our immune systems are built to fight off such illnesses. But Doc says...

If you're in a group that's at a higher risk for complications, you should get a flu shot... That includes:

• Folks aged 65 and older

• Those with a compromised immune system (including autoimmune diseases like Crohn's and those undergoing cancer treatments)

• Those who have heart disease or are at risk of heart attack

• Pregnant women

• Babies and young children

Similarly, if you're around someone who falls into one of those groups, consider getting a vaccine. For instance, if you're caring for someone recovering from chemotherapy, you don't want to risk exposing them. Complications for these folks can be life-threatening.

Like Doc, I used to be hesitant to get the flu shot consistently, mainly because I was younger, felt healthier, and when I did to get the shot, I always seemed to get sick not long after.

But now I fall into the category of being "around someone" – actually multiple people – that fall into the group that's at a higher risk for complications from the flu. It's not about little old me anymore, so I got my shot over the weekend.

It was easier than ever before...

Beneath a giant white outdoor tent at a local medical facility that's also being used for COVID testing on different days, the whole process only took a few minutes... from check-in to the nurse's jab I didn't even feel to getting back in the car and leaving with my family.

I realized afterward that the flu shot set-up we just experienced simply didn't exist before COVID.

It got me thinking about how many other routine medical appointments could be done like this... in something like an outdoor, covered venue, slashing time and the costs of perfunctory office visits.

Our colleague and Cannabis Capitalist editor Thomas Carroll, who has analyzed health care stocks for two decades, wrote about this idea to us in a private note recently...

Another look at the pandemic...

We know the stress the health care system has endured during the pandemic, and the nearly 5 million deaths worldwide attributed to it... but in his note to us Tom described how the pandemic has changed the health care system – generally for the better.

He says things like increased telemedicine options... the potential for mRNA technology (which was used to quickly create the COVID vaccine)... and greater awareness of simple hygiene efforts are among the biggest enduring trends.

The last one – which resulted in ubiquitous bottles of hand sanitizers and millions of people singing "Happy Birthday" while washing their hands – combined with the lockdowns, resulted in a nearly non-existent flu season last year...

That's a big deal. As Tom told us...

Direct costs related to the flu are estimated at $11.2 billion a year. These include all expenses directly related to physician and hospital costs. But adding in productivity losses, lowered normal spending levels due to illness, etc., the flu costs the overall economy much more.

A 2007 study found the U.S. economy was negatively impacted by $90 billion. A 2014 study estimated flu's cost at $87 billion. A 2017 study with a narrowed scope estimated economic impact at $45.3 billion.

Let's call the overall impact to GDP about $50 billion. If half of this is prevented with vaccine and better hygiene, all of us have more cash in our pockets to spend, save, and push the economy forward.

With more masks off now and kids back in school, many doctors say they won't be surprised if the flu rebounds this winter... Respiratory viruses quickly spread through day cares and schools when kids got back in classrooms earlier this year.

If you're interested in getting the flu vaccine, the Centers for Disease Control (which admittedly has put out confusing guidance on COVID all pandemic long) is straightforward about the flu shot. It encourages people to get it by the end of October.

Most Americans with health insurance can get a shot at a doctor's office or pharmacy with no co-pay.

For more information, be sure to check out Doc's essay on why he's getting a shot.

Winter Is Coming

The growing energy crisis stemming from global supply-chain constraints – which we wrote about yesterday – is creating massive issues in Europe and China. Nations are bracing for winter, colder temperatures, and higher energy prices...

Abaxx Technologies CEO and founder Joshua Crumb and the company's senior economic advisor David Greely join our editor-at-large Daniela Cambone to explain...

Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and don't forget to follow us on Facebook, Instagram, LinkedIn, and Twitter.

New 52-week highs (as of 10/11/21): Brown & Brown (BRO), Continental Resources (CLR), Mosaic (MOS), Cloudflare (NET), Northrop Grumman (NOC), Palo Alto Networks (PANW), Royal Dutch Shell (RDS-B), VanEck Vectors Russia Fund (RSX), Telekomunikasi Indonesia (TLK), Tata Motors (TTM), and Viper Energy Partners (VNOM).

In today's mailbag, more thoughts on supply-chain concerns... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"There's a double whammy associated with all of the pandemic-driven labor and supply challenges that isn't really being talked about...

"10,000 Americans are still turning 65 every day, and the pandemic has accelerated retirement plans for many others... making the labor shortage even worse!

"Love my Stansberry subscriptions! Keep up the great work!" – Paid-up subscriber Dave J.

All the best,

Corey McLaughlin
Baltimore, Maryland
October 12, 2021