Keeping score is an important thing. I did learn early on that it was minimized with Kindergarten sports, though many kids as well as parents still keep track. When it comes to Sports and Politics, keeping score is a must. Publicity and propaganda can artificially influence people’s thinking, but numbers don’t lie. It’s the same thing with the Market.
With all of the political and geopolitical issues that have been tugging at emotions and plaguing the Market, it’s really Earnings that drive stock prices. So far, Earnings have been very solid. Earnings Season is the period which happens 4 times per year where companies report facts. They report how they’re doing and provide insight as to where things are headed. It’s like a Corporate Report Card. Most CEO’s are measured by their stock price which is how it should be because they work for shareholders.
We are self-proclaimed Market geeks at this firm. We love what we do. We live within numbers. We also understand that not everyone does. I’m about to throw a bunch of numbers your way, but they’re important. For those of you that get a headache when you see a lot of numbers, I am very sorry, but thank you in advance for staying with me. I hope you actually find it helpful.
Earnings Scorecard
So far, roughly 80% of the S&P 500 companies have reported Q1-2017 results. Both earnings and revenues have been stronger than expected. Of the 400 companies in the S&P 500 that have reported, 76% have beaten earnings estimates. Equally, if not more important, revenues are growing faster than expected. Revenue is the purest form of measuring demand. We pay very close attention to revenues. Make no mistake, the Market loves profits. But Earnings can be engineered a bit with stock buybacks and cost controlling. Revenues are all about how much stuff is being sold. A lot of stuff was sold in Q1, and demand continues to increase. 78% of the companies grew revenues in the quarter and 63% of them beat the Street’s expectations. Just last quarter, less than 50% of the companies beat sales forecasts. This is no small deal, and very supportive of this Bull Market. After 2 years of absence, Growth has returned.
For the year, the S&P 500 is slated to grow earnings by 11%. Revenues are expected to grow 5.5%. This is a significant improvement from the Earnings recession from last year. The US economy is growing and the American Consumer is spending again. You may recall, 70% of the US economy is consumer spending. Corporate America reflects this accelerating activity. The Consumer sector represents nearly 30% of S&P revenues. That includes companies like Disney, Starbucks and Amazon. However, Consumer companies account for just 19% of S&P profits. Tech is the most profitable sector by far, accounting for 22% of S&P 500 earnings but just 11% of S&P revenues. Companies like Apple, Google and Facebook are very profitable. The Banks can be very profitable as well, and the combination of rising interest rates and a growing economy is fuel to Financial stocks.
Today, the 5 largest companies in the S&P 500 are Technology companies based on the West Coast. They are Apple, Google, Microsoft, Facebook and Amazon. 3 of them didn’t even exist 25 years ago. These are the disruptors. Disruptive technology has been a game changer. An important factor in this digital age we live in is the fact that not everyone is benefitting. That means adapt or die for companies and industries. Competition is fierce. I’m sure you’re aware the impact that Uber has had in the transportation industry. It’s been a big win for consumers, but it has been a nightmare for taxi cabs. A New York City taxi medallion recently sold for $241,000. Out of context, that might seem like a really big number. But when you consider that medallions sold for more than $1 Million in 2013, it really puts things into perspective. Darwin had it right. Ultimately, only the fittest survive. We evolve. We innovate. We execute. We learn. We fail. We succeed. We keep trying. And numbers tell the story best.
Have a nice weekend.
Mike
