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Earnings Q3: Record breaking season overshadowed by news cycle: Darrell Cronk

Yahoo Finance’s Brian Sozzi, Myles Udland, and Julie Hyman break down today’s market action with Wells Fargo Investment Institute President, Darrell Cronk.

Video Transcript

MYLES UDLAND: Darrell, let's talk maybe looking out over, you know, over the next year or so in thinking about the picture for 2021, particularly as it relates to the corporate earnings backdrop. Because we've seen earnings really start to take this V-shaped recovery. And some of that obviously is the composition, the indexes, and so on. But that thesis, I think, has a lot of investors excited about what the next year or so could hold.

DARRELL CRONK: Yeah. That's exactly right, Myles. I mean, what got overshadowed here with all the other news events of the day was a Q3 earnings season for the record books. We're going to come-- we've got about 87% of S&P companies now that have reported.

We're tracking about 19% better than expectations coming into the quarter, which is almost unheard of. Now, to put that in perspective, we're still down about 8 and 1/2% year-over-year on earnings. So we're still not back to the high watermark of total earnings in 2019. But we think we'll get there in 2021.

And I think one of the really important things that may be getting missed by a lot of investors here is remember pre-election, it was all about tech all the time, right? It was those narrow large cap tech stocks that were driving everything. Now, you're actually seeing a broadening of participation, which is exceedingly healthy in the markets.

You're getting industrials to participate. You're getting health care to participate. You're getting discretionary and staples to participate. Com services is now your best performing sector in the S&P over the last 30 days, even besting technology. So that's a healthy thing. That's a good thing.

JULIE HYMAN: At the same time, Darrell, it's perhaps even more impressive that we're seeing the record earnings numbers when there are companies that are really not participating. And not just companies, but whole sectors-- airlines, leisure, you know, that have just not come back here.

So as you're sort of trying to make decisions in the market right now, does it make s-- you know, I want to I guess ask you about valuations. Does it make sense to pay up for the companies that are growing right now? Does it make sense to still pay up 'cause people have been doing it thus far this year?

DARRELL CRONK: Yeah. It's a great point, Julie. And we think the answer to that is yes. And it's yes because you want those secular growth themes. You want people who can drive top-line revenue growth. Again, one of the more underappreciated elements we think in this market is, if you can return to some normal semblance of revenue top-line sales growth, companies are doing really hard work right now on the expense line, right?

There trying to, in the pandemic, take out expenses, which we think will flow straight through what we call operating leverage or straight through to the bottom line. So you could actually see kind of a hockey stick in earnings because even when revenues return to a semi-normal state, the fact is the expense base will be less, which flows straight to the bottom line earnings. So it could have an accelerant on earnings into next year if we get some semblance of normalcy.

JULIE HYMAN: All right. Darrell Cronk is the president at the Wells Fargo Investment Institute. Darrel, thanks so much for joining the program. We'll talk to you soon.

DARRELL CRONK: My pleasure.