Wow, JPM beat the expectation by 50% but....

The first quarter earnings season has been kicked off today, first by banks and then a lot more moving into next few weeks.  JP Morgan (JPM) was the first of the major banks to report earnings today.  And The bank reported earnings of $4.50 per share – more than 50% above expectations. WOW. Oddly though, JPM is trading much lower today, nearly 2% loss, as a reaction to the fantastic earnings report. What does this tell us? Well, if a 50% surprise results in the stock trading lower, then any company that fails to meet expectations is likely to get obliterated!!😨

To give you more perspectives, here is one analysis I saw, which should provide some caution to those who are expecting another euphoric run in the next few weeks. 

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Tuning Out the Market's Noise

The main indicator you need to watch as we head into earnings season is the Cyclically Adjusted Price-to-Earnings (CAPE) Ratio.

Unlike regular price-to-earning (P/E) ratios – which measure the price of a stock relative to its earnings at a given point in time – the CAPE is cyclically adjusted. That means it smooths out the effects of recessions by averaging out earnings over a 10-year span – making it a good tool for historical studies.

In this way, the effects of economic shocks on earnings (like the pandemic) get absorbed into the average. The CAPE ratio also removes inflation from prices, leaving us with real returns. It tunes out all the "noise" of the market and gives you the real picture.

Take a look at the chart below…

This chart shows the average yearly return of the S&P 500 at various CAPE ratios. And based on this data, investor expectations at these levels should be tempered at best.

We are currently at 36.61 CAPE. That's high… And it implies that – statistically at least – investors have already been rewarded by higher stock prices.

Now, there are those who will say technology is changing everything… And because of that, "it's different this time." Others justify these levels based on the zero interest rate policy from the Fed.