Stocks Gearing Up
There are plenty of villains to blame for the Dow’s nosedive of more than 2,000 points last month.
Escalating trade tensions with China, rising interest rates and election year politics…
They’re all easy targets. But have you heard the one about peak profits?
No doubt you have. Plenty of talking heads on the lame-stream financial media channels are out in force blaming the market’s decline on corporate earnings growth or peak profit margins.
If you’ve heard ’em too, don’t believe a word of it. Here’s the hard evidence.
Nearly three-quarters of S&P 500 companies have reported third quarter results so far. Have many fallen short of earnings expectations?
Are top-line sales tanking?
But estimates for profit growth going forward must be coming down, right?
As you can clearly see in the graph above, S&P 500 earnings continue to expand at a healthy clip, even as the index itself is now 8% cheaper than a month ago. Contrary to what the know-nothings in the financial media are touting, here are the facts:
- S&P 500 profits are on track to grow nearly 25% year-over-year marking another spectacular quarter, the 2nd best quarterly growth since 2010…
- Top-line sales are growing 8.5% year-over-year, with 61% of companies reporting actual sales above analyst estimates…
- Nearly 80% of S&P 500 companies are reporting profits above estimates, with an average earnings surprise of +6.8% above the 5-year average of 4.6%.
Even better, estimates of future profit growth are on the rise too.
Management across the board is guiding above analysts’ forecasts, with the 1-month ratio at 110%. This means more companies raising than lowering their guidance. That’s well above the long-term average of 70%.
So much for the myth of peak profits!
Taking a deeper dive into which sectors are driving better than expected profit growth this quarter we have communications services, technology and health care posting the highest number of earnings-beats so far.
Meanwhile, future earnings guidance is most positive for technology and real estate stocks, and there’s even more good news on the horizon.
S&P 500 companies have bought over $2 trillion worth of their own stock in recent years, providing a big boost to share prices. Companies are not allowed to buy back shares during earnings season, but now that earnings season is nearly over the buyback blackout period is also coming to an end.
The means companies in the S&P 500 will soon be free to start buying back their own shares, and at a steep discount too.
Make no mistake, share buybacks are the single largest source of demand for stocks and that demand is about to increase by an estimated $170 billion during the month of November alone.
Drilling down to the sector level, technology, consumer discretionary and health care stocks have had the most stock buybacks over the past five years.
And these are the sectors I believe are most likely to dive back into the market first to buy their own shares after earnings season.
Bottom line: If the recent correction is indeed over, stocks should stabilize shortly after midterm election results.
Then, continued strong profit growth and renewed share buybacks could easily propel stocks to new record highs by year’s end.
Here’s the other side of the coin. If stocks keep falling in November, in spite of strong earnings and share buybacks, then look out below.
Either way, we’ll know soon enough. But my money’s on the bulls!
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch
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