This One Chart Changes Everything
Another earnings season is nearly in the books and it’s been another stellar performance from Corporate America.
Of the 80% of S&P 500 companies reporting second-quarter results so far, nearly three-quarters of them (73%) have exceeded profit expectations.
In fact, earnings are on track to grow 21%-plus year over year. That’s the best earnings growth rate in nearly a decade. And that’s on top of nearly 25% profit growth in the first quarter.
The technology sector continues to lead the profit parade with earnings expanding by a stunning 32% over the same period last year.
And yet some of the highest-profile misses came from some of the market-leading tech darlings. Of the FAANGs (Facebook, Amazon, Apple, Netflix, Google), as reported previously, Netflix (NASDAQ: NFLX) and Facebook (NASDAQ: FB) were both taken out to the woodshed, plunging nearly 20% after disappointing investors. And old-school tech blue chip Intel (NASDAQ: INTC) tumbled over 15% after disappointing results.
Now, what do we make of this?
As previously stated, the investment game is more about expectations than reality. And investors have great expectations for corporate profits in general, especially for the market-leading tech stocks.
This means that anything less than flawless results is an excuse to sell first and ask questions later.
Source: BofA Merrill Lynch Global, MSCI, IBES
Speaking of expectations… The biggest caution flag for the market at present is how long can the strong profit growth parade continue amid escalating trade war tensions. Maybe this is as good as it gets.
You can see this fear factor graphically displayed above.
Sure, actual results were fantastic in the second quarter, but stocks are about what have you done for me lately?
Remember, it’s all about expectations for future profit growth. It’s not about the past. And as you can see above, earnings growth expectations are falling fast.
In fact, the ratio of upward-to-downward earnings estimate revisions for the S&P 500 has fallen for the last five months in a row from February’s tax cut-fueled spike higher. And the sales revision ratio has declined for the past four months straight.
The good news is analysts still peg S&P 500 earnings growth at 20%-plus for full-year 2018.
Also, both sales and earnings revisions are still well above the average over the last five years.
The point is this isn’t game over, just a caution flag to keep a watchful eye on.
But when you add it all up — declining earnings estimates (albeit from a very high level), growing trade tensions and negative stock market seasonality — it’s probably a good idea to exercise caution right now.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch