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Big-Picture Investing as Q1 Earnings Loom: Stocks to Watch

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“Past performance is not indicative of future results.”

We’ve all heard this common disclosure in the financial industry.

The truth is nothing is guaranteed. Stocks can experience drastic price moves – both positive and negative – in a very small window of time.

In the financial markets, history rarely repeats itself exactly – but it often rhymes. And while past performance certainly can’t predict the future, we are privileged to have many decades of market statistics that can guide us in the current environment.

Although events outside of our control can dictate portfolio performance in the short-term, history has shown that investors who buy and hold the best companies over time tend to do very well. As investors, we want to maintain flexibility and remain unbiased in our approach.

What Can We Learn from History?

Most investors (and even professional money managers) were hesitant over the past year to accept the idea that we had entered a new bull market. But with stocks eclipsing their all-time highs over the past few months, nearly everyone has now come around. We are currently in the second year of a new bull market – that is an undeniable fact.

The S&P 500 has been in 10 bull markets (not including the current one) since 1950. New bull markets have lasted an average of 5.4 years from the prior bear market’s bottom:

Zacks Investment Research
Image Source: Zacks Investment Research

The longest bull spanned more than 12 years and ended with the dot-com bubble, while the shortest bull was the most recent one and lasted just 21 months (2020-2022).

What about new highs? Even after stocks have begun a new bull market, it takes some time for them to ultimately break their former highs from the prior bull market.

This time around, it took more than two years for the S&P 500 to break above the highs from January 2022. New highs should be viewed as a sign of strength; it means that stocks are ultimately surpassing levels that met former resistance, and a breakthrough of those levels normally ushers in additional buying pressure.

The S&P 500 hit a new high in January of this year. Dating back to the 1950s, once those former highs were put in the rearview mirror, bull markets have lasted an average of another 4.5 years. This overlooked fact suggests the potential for more gains ahead that could be substantial. Investors normally underestimate the length and magnitude of bull markets.

By contrast, we’ve seen 15 bear markets over the same time frame. We see bears occur roughly every 4-5 years and they tend to be short-lived, typically lasting about 11 months. The fact that we saw 2 bear markets in just the past few years speaks to low probabilities of another one happening soon. Of course, anything is possible in the financial markets.

This is not to say that investing is easy; stocks always experience some form of volatility along the way. We saw above that in year 2 of new bull markets, the S&P 500 averages a nearly 10% decline.

Whether it be bull or bear markets, volatility is the one constant that we must be comfortable accepting and incorporating into our outlook. As always, there’s no shortage of concerns in the current market environment, including mixed inflation data that suggests higher prices will linger along with growing tensions in the Middle East.

Stocks to Watch as Q1 Earnings Get Underway

The earnings slate is set to heat up in the coming days.

After the closing bell this evening, streaming giant Netflix (NFLX - Free Report) is set to report first-quarter results. Analysts are expecting NFLX to deliver quarterly earnings of $4.50 per share, reflecting a 56.3% improvement relative to the same quarter in the prior year. Revenues of $9.26 billion would mark a 13.4% jump versus the year-ago period.

Netflix is benefitting from its growing subscriber base and a crackdown on password-sharing. The streaming giant has delivered a trailing four-quarter average earnings surprise of 5.4%.

NFLX stock is currently a Zacks Rank #3 (Hold). Shares have handily outperformed the market in 2024 with a better than 25% return.

Image Source: StockCharts

Also reporting after the bell today is medical device maker Intuitive Surgical (ISRG - Free Report) . The company is the maker of the popular da Vinci Surgical System, which enables complex surgery using a minimally-invasive approach.

The da Vinci System is powered by robotic technology, which has provided Intuitive Surgical with solid exposure to artificial intelligence for healthcare. The system provides 3D High-Definition vision, enabling surgeons to gain superior clarity of target tissue and anatomy.

The robotic surgery giant is expected to deliver Q1 earnings of $1.40/share, translating to a 13.8% surge compared to the prior year’s quarter. Expected revenues of $1.86 billion point to a 10% increase year-over-year.

Image Source: StockCharts

What the Zacks Model Reveals

The Zacks Earnings ESP (Expected Surprise Prediction) seeks to find companies that have recently seen positive earnings estimate revision activity. The idea is that this recent information can serve as a more accurate predictor of the future, which can give investors a leg up during earnings season.

The technique has proven to be quite useful in finding positive surprises. In fact, when combining a Zacks Rank #3 or better with a positive Earnings ESP, stocks delivered a positive surprise 70% of the time according to our 10-year back test.

ISRG is a Zacks Rank #3 (Hold) and boasts a +6.5% Earnings ESP. Another beat may be in the cards when the company reports Q1 results this evening.

Final Thoughts

History has shown us that the second year of new bull markets tends to deliver solid returns. We should be open to the idea of this bull potentially lasting for several more years, or perhaps even longer.

Still, it’s never easy dealing with uncertainty. There’s always volatility along the way, even in the strongest bull markets.

It’s important to keep the big picture in mind and remember that the primary secular trend is bullish and remains intact. We do not want to allow excessive fear of a pullback or deeper correction to harm our longer-term returns. The biggest mistake we can make early in a bull market is to think that stocks look expensive just because the index price is high.

Make sure to keep an eye on leading stocks as we head deeper into the first-quarter earnings season.

See More Zacks Research for These Tickers

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