Earnings Season is in full swing. Corporate earnings reports are basically report cards for companies to see how they’re really doing. It happens 4 times per year, and provides the fundamental facts about a stock. Heading into Friday, all 18 of the 30 DOW stocks that reported earnings beat expectations. That changed when Chevron and Exxon missed this morning. The price of oil has been a big driver of stocks, both down and up. No surprise, the fall from $100 oil has had a major negative impact on Energy company earnings. Other sectors have picked up the slack.
Earnings growth has been declining for a year and a half. The strong Dollar and trouble overseas have weighed heavily on Corporate America. Growth has been hard to come by for a while. Revenues are expected to decline again in Q2, which would make for 6 consecutive quarterly declines. That has not happened since 2008, before this Bull Market was born. Companies that are growing have seen their stock prices perform well. Technology is the largest sector of the S&P 500, and has the greatest influence on earnings, accounting for roughly 20%. Though Tech earnings have been hurt by the global slowdown, with nearly half of Tech company revenues coming overseas, they have been stabilizing. Google shattered expectations, with over 20% revenue growth in Q2. Amazon beat expectations easily, and saw its cloud business grow revenues over 50% in the quarter. Expectations were so low for Apple heading into the quarter, the company reported that things were less bad, which meant good for the stock.
July was an eventful month, with a powerful summer rally. The rally stalled a bit this week, but new strength has been found in Tech, and the previously underperforming NASDAQ has soared. It was a great week for Tech, on the back of earnings from Apple, Google, Amazon and Facebook. Energy has struggled after being on fire earlier in the year. This volatile Market in 2016 has seen many rotations of strength under the surface. Early on it was Energy then Utilities and Staples. Financials took off after Brexit, and now it’s Tech that’s carrying the weight. It’s been a complete stock picker’s Market.
With a Market Cap of nearly $600 Billion, Apple alone accounts for 3% of the S&P 500, and is the largest single contributor to earnings. Apple is a stock behemoth. However, it’s teeny when you consider that IBM alone was over 6% of the S&P 500 back in 1985. Google and Amazon are large positions as well, representing 2.5% and 1.5% of the S&P. These Tech titans clearly have great influence on the overall Market. All 3 rallied off their earnings reports this week, with both Google and Amazon reaching new, all-time highs.
The good news is broad based growth is expected to return the second half of the year. That’s the most important thing for investors. The Stock Market is forward looking. The past is the past. That’s why stocks can rally during challenging times. News gets processed quickly and expectations are priced in immediately. There are many unresolved issues at play, with tremendous uncertainty. The Market is looking out beyond, and seems to like what it sees. We still need to get thru August and September, traditionally the worst months for stocks. But 2016 has been anything but traditional.
Have a nice weekend. We’re all over it. We’ll be back, dark and early on Monday.