Over the last two months, the stock market has put on an impressive rally. Shares of nearly every stock have soared. However, I want to caution investors that not all stocks will continue to enjoy the gains to come.
HSBC notes that during the first-quarter earnings season, two out of every three companies beat expectations. That’s good news and it also tells us that expectations were obviously too low.
Underneath that, however, are still signs of weakness.
“Andrew Lapthorne at Société Générale points out that 62% of American companies have missed expectations for sales. That implies the profit improvement is coming from higher margins, something that it is hard to believe can persist given the economic backdrop.”
That’s exactly right. When I analyze a company, I look at earnings growth and margin expansion, but we also consider sales growth as well. Expanding margins is good but it can only take you so far.
Going forward, investors need to focus on stocks that have healthy margins plus strong sales and earnings growth.