Report Cards

For those of you who would prefer to listen:

Stocks soared to start November, with the best weekly gains of the year. Of course it came as October ended with 3 consecutive monthly declines. That had not happened since 2020. That was deep in the heat of Covid. We know all too well how price action can shake things out.
There are some serious challenges out there; Far too many to mention. The War in Israel presents so many risks. So far, the Market has taken it very much in stride. It’s completely counterintuitive. After initially jumping, the price of Oil has fallen to levels lower than it was before the attack on October 7. Current foreign demand is slowing, particularly China is the culprit for prices of late. That means gas prices have fallen too. The Market likes that for now (lower energy prices). But the demand backdrop could become a larger Macro problem, time will tell.
Saudi Arabia has been placed on high alert after Saudi soldiers were killed by Iran-backed Houthi forces along the Yemen border. Houthi rebels pose a huge risk to disrupt Oil supplies. That would send energy prices back skyward.
The Fall Report Cards are out on Wall Street. Let’s call them “less bad”. Good is all relative. Besides, with the Market it’s all about expectations. The week ended with the monthly update on jobs.
The October Job report came in cooler than expected. 150K jobs were created. 180K were expected. September was revised lower too. The unemployment rate ticked up to 3.9%. The annualized wage growth was 4.1%. That’s the lowest since June of 2021. All this added more support to the “Peak Fed” theory and a reprieve from the choking rate hikes.
The Fed met again this week. Another rate hike didn’t accompany the meeting. It wasn’t supposed to. After increasing interest rates 11 times, taking the overnight rate from 0% to 5.5%, the Fed has paused. It wants to see the effects of its actions in pursuit of taming inflation. There have been consequences. Shocks have occurred. Existing home sales are practically frozen at 15-year lows, volumes have dried up and it’s starting to cause some stress. The Market has been volatile. Several banks broke along the way.
It’s still far from clear if the rate hikes are done. Fed Chair Powell said this Wednesday when asked if the central bank has accomplished its goal: “We’re not confident that we haven’t, but we’re not confident that we have.” Alrighty then. That pretty much sums it up. Stocks rallied anyway, sniffing out lower rates ahead.
More than anything else, over time, it’s earnings that drive stock prices. Corporate America has been submitting their Fall report cards. Apple reported its September quarter results Thursday. It’s always a major Market focus. Apple is the largest company in America and the largest component in the Stock Market. What Apple does matters.
The Cupertino company reported a double beat with strong services business performance and a 3% growth in iPhone sales. Apple’s gross margin hit a record high 45.2% with help from lower commodity costs. But that was in the rearview mirror. The disappointment came with the guidance. Apple management said the calendar Q4 revenues will be similar to last year. That’s an indication there won’t be as many new iPhones under the tree as expected this Holiday season. The Market didn’t really like that.
Earnings Season is starting to wind down. 81% of the S&P 500 companies have reported thus far with revenues +1.8% and the blended growth rate for Q3 S&P 500 earnings now stands at +2.2%, up from the -0.3% expected. So far, 78% of companies have beaten the Street expectations. That is better than the 74% one-year average. In aggregate, companies are reporting earnings 7.7% above expectations. That’s well above the average positive surprise rate of 4.4%.
The Market doesn’t like negative surprises. Companies that miss on earnings have seen their stocks decline on average 5.2%. But beating estimates never guarantees success. Morgan Stanley pointed out that despite beats, only 38% of stocks have gone up after reporting a positive surprise. The average T+1 day return has been -1.6%, even worse than the -0.5% for the “sell the news” Q2 earnings season.
Things have definitely slowed. Only 62% of companies have reported revenues above expectations. That’s running below the 69% one-year average. A Bank of America study showed that organic sales growth remains negative at -2.5% year-over-year. In fact, 5x as many companies have guided lower sales estimates for every increase in October. Companies highlighting “weak demand” on the conference calls have jumped to recessionary levels. In addition, Q4 EPS has been cut by 2%.
Then there’s this: Expectations for 2024 are still really high. The Street still anticipates earnings to accelerate next year with 12% growth. We aren’t so sure about that. For reference, this year’s earnings are likely to end up around flat year-over-year from ’22, depending on how Q4 comes in. That 12% growth next year seems like a pretty tall order with everything that’s going on. Demand for stuff and services has been shrinking. And there’s a pretty constant trend in place. We are paying a lot more for less.
The 10-Year Treasury yield hit 5% in October. That was the highest since 2007. It fell to 4.5% today. It’s the lowest level since Labor Day. The cooler job report and Fed comments about a continuation of the pause triggered the relief. The Dollar fell too. That provided some more juice for stocks to rally.
November has been the third-best month of the year for the Stock Market. The average monthly gain for the S&P is 1.5% over the last 4 decades. It saw positive returns two-thirds of the time. More recently, over the last ten years, the average return was +3.2%. November and December have been the best two-month combo period with an average gain of 3% and positive performance 75% of the time.
The seasonal set-up was there. It’s a nice start. The level of pessimism got so high from oversold levels, a bounce back was due. More back and filling is likely. We expect this wild and choppy price action to continue.
Have a nice weekend. We’ll be back, dark and early on Monday.

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