TGIF – Numbers, Earnings, Noise and Simplicity

Here’s another numbers piece, but those of you who generally don’t like numbers, I think you will still get value out of this one. For those of you who do like numbers, I hope you dig this. You’re the judge. I look forward to your comments.

It’s Earnings Season. Four times per year companies present their report cards to show how they did and how they anticipate things ahead. As Market professionals, it’s refreshing to be able to study facts and interpret trends to help refine and develop investment strategies. During this time we can tune out political noise and other distractions. These days there is plenty of noise and distractions out there and the volume is deafening. The reason is simple; Earnings drive stocks. Corporate profitability is the single largest influence on stock prices. That is why we were less concerned about the growing political and geopolitical issues in the beginning of the year, because we anticipated earnings growth to accelerate in 2017. And it has.

Over 90% of S&P 500 companies have finished reporting 3rd Qtr earnings and revenue results. The numbers are looking good. Of the 457 companies that have reported, 74% exceeded earnings estimates. The combined earnings growth has come at a solid 6.1% year-over-year. On the revenue side, 66% beat sales estimate so far, with a 5.8% growth rate from last year. This is a really good sign because revenues are the purest measure of demand growth. Revenues grew for 79% of S&P companies. The 4th Qtr is expected to see double-digit earnings growth, as the increased Holiday spending helps fatten up the bottom line.

The global economy has been accelerating too. It is growing at a 3.5% pace this year and is expected to increase 3.7% in 2018. That is a healthy advance from last year’s 3% growth rate. Emerging Markets like India and China are setting the pace, and we see this continuing. Companies exposed to global markets are doing even better. S&P companies with greater than 50% of their sales overseas saw their revenues grow 10% and their earnings grow a whopping 13%. The weak Dollar has helped too.

As you know, stocks are a discounting mechanism. That means that they anticipate future events and they begin pricing them in. That’s why it’s common for a “sell the news” event. On average, the companies that reported positive reports, meaning they met or beat expectations, have seen their stocks increase 0.4% this Earnings Season. However, companies that disappointed by missing expectations have seen their stocks fall on average 3.5% the following day. In some cases, disappointing earnings have led to double-digit declines. What we are seeing is the Market is rewarding positive earnings reports less than the historical average and are punishing misses much more so. That happens in an expensive Market, and this Market is certainly on the expensive side.

This has been a growth and momentum Market and growth stocks have been leading. But for how long? Good question. We are hyper-focused on this. There are more signs that growth stocks have gotten ahead of themselves and are priced for perfection. In fact, both the DOW and S&P broke their 8-week win streaks, which was the longest consecutive run in 4 years. Valuations are on the high side across the board and are extremely expensive in certain areas, particularly in Tech. Not all stocks are expensive because not all stocks have participated in the rally. Areas that are on the cheap side can be found in Financials and the Consumer sector, which has not performed well in 2017, and both are looking attractive to us. Expensive stocks on one side, cheap stocks on the other. Buy low, sell high. Heard that one before? Generally, it’s good policy. Except for the times when you buy low and they go even lower so you need to buy high before they go higher. That’s what’s been happening. That’s what makes a Market. There’s a lot of confusion out there. It’s the noise that causes it. Most times it pays to keep it simple.

Have a nice weekend. We’ll be back, dark and early on Monday.


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