Earnings Roundup at the Turn
Q2 earnings aren’t as bad as expected, but the market is narrowing. Here’s what’s coming
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***Just a few weeks ago, the financial press was doing its best to strike fear into the hearts of investors, warning of a Q2 earnings melt-down
Here’s the headline we featured in our July 2nd Digest illustrating the gloom-and-doom:
Of course, not everyone was so bearish.
Famed growth investor, Louis Navellier had a more balanced perspective. He focused less on fear and more on identifying strength. From his update in early-July:
… due to strong stock buyback activity, a pessimistic analyst community and the fact that operating earnings surprises are common, I think the S&P 500 could eke out a positive earnings gain for the second quarter. But it will be a close call. So, the stocks with both strong sales and earnings momentum remain the most attractive buys right now.
As of last Friday, almost half of all S&P 500 companies have reported earnings. So how are the numbers shaping up?
Short answer — as you probably guessed, it’s not quite the nightmare the press suggested.
Of the 221 S&P 500 companies reporting through last Friday, 170 (77%) have surprised investors with better-than-expected results. Plus, we’ve seen strong numbers from some key market leaders.
For example, this past Friday, Alphabet and Twitter both beat expectations. Shares popped 9.6% and 8.9%, respectively. That comes after Coke and UPS posted good numbers earlier last week — UPS stock climbed 8.7% and Coke hit a new all-time high.
Of the S&P companies that have reported so far, average earnings are up 0.7% from a year earlier.
That said, we’re still on track for negative earnings after all companies report. However, given some of the positive surprises that have come in, analysts are revising forecasts, calling for a 2.6% earnings contraction, which is an improvement over the 3% contraction previously anticipated.
***Companies with significant exposure to overseas revenues are feeling more pain than U.S.-centric stocks
The strong U.S. Dollar and tariffs are putting pressure on the bottom lines of international companies. This echoes what Louis wrote to subscribers in mid-July:
The other headwind that many S&P 500 companies are still facing is the strong U.S. dollar. The U.S. dollar’s strength continues to hinder many multinational companies.
To illustrate this overseas-impact, FactSet divided the S&P 500 index into two groups — companies that generate more than 50% of sales inside the U.S. (less global exposure) and companies that generate less than 50% of sales inside the U.S. (more global exposure).
The blended (combines actual results for companies that have reported and estimated results for companies yet to report) earnings decline for the S&P 500 for Q2 2019 is -2.6%. For companies that generate more than 50% of sales inside the U.S., the blended earnings growth rate is 3.2%. For companies that generate less than 50% of sales inside the U.S., the blended earnings decline is -13.6%.
That’s a stark difference and points toward a key takeaway: U.S.-centric companies with strong top- and bottom-line growth are the safest places for your money right now.
Here are more details from Louis’ update to his subscribers:
… here in the U.S., economic growth remains relatively robust. The Commerce Department announced that second-quarter GDP came in at an annual pace of 2.1%, slightly higher than economists’ expectations for a 1.9% increase. Consumer spending soared to a 4.3% annual pace, up from 1.1% in the first quarter. So, while GDP growth decelerated from 3.1% in the first quarter to 2.1% in the second quarter, the preliminary GDP report for the second quarter was very encouraging.
Overall, the U.S. remains an oasis. As long as inflation remains moderate, the U.S. economy continues to grow and the Fed keeps interest rates low, investors will return to the stock market in droves. And that continues to bode well for our fundamentally superior stocks.
***What to expect from earnings as we look toward the second half of 2019 and the first half of 2020
As I write, expectations are that this current earnings season will wind up posting a -2.6% decline in earnings with 4% growth in revenues.
For Q3, current estimates are for another earnings decline of -1.9%, coupled with revenue growth of just 3.2%.
In Q4, we’re expected to swing back into growth mode, with earnings anticipated to come in at 4.9% and revenues climbing back to 4%.
But what’s more interesting and exciting is what’s expected to come in 2020. Q1 earnings growth is pegged at 9.2%, followed by 12.6% expected growth from Q2 next year.
So, it appears if we can weather some shorter-term weakness, we’re headed back into growth mode as the markets approach Christmas and beyond.
If you’re looking for a free tool to help you evaluate the strength of your portfolio as earnings season rolls on, check out Louis’ .
As an example, I just entered Microsoft:
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***In the meantime, all eyes are on the Fed tomorrow
Tomorrow, the Fed will be reporting its decision on interest rates.
Here’s Louis on what he expects we’ll see:
Aside from another round of earnings reports scheduled for this week, Wall Street’s attention will zero in on the Federal Open Market Committee (FOMC) meeting. In my opinion, the Federal Reserve is set to cut key interest rates this week.
As you know, the collapse in global interest rates this year pushed Treasury yields dramatically lower and temporarily “inverted” the yield curve. The Fed wants to “un-invert” the yield curve, since it is bad for the banking industry that it regulates. In addition, inflation has failed to reaccelerate as the Fed anticipated this year — and that’s likely to weigh in the Fed’s interest rate decision.
Frankly, at this point, everyone expects a rate-cut. CME Group’s FedWatch tool puts the expectation of a cut at 100%, which is where it’s been for a while now.
As you can see below, 72.9% are looking for a quarter-point cut, while the remaining 27.1% believe we’ll see a half-point.
With the Fed having sent signals it’s likely to cut rates, and with market participants so certain a rate-cut is coming, we have to assume that a quarter-point cut is already priced into the market.
Given this, if we get that cut, we’re not anticipating substantial fireworks. But if the Fed surprises us by cutting a half-point, or (God-forbid) keeping rates steady, look for far more volatility.
Wrapping up, here at the turn of Q2 earnings season, it appears we’re tip-toeing through relatively unscathed. That said, the number of companies posting strong numbers is narrowing so focusing on quality remains important.
Fortunately, when you do that, good things often happen — for example, over the first half of 2019, Louis’ fundamental-based approach helped subscribers lock in a 274% gain from NVDA, 115% from WP, 211% from IIN, 122% with NFLX, and 150% from WWE. If you’d like his help in finding similar companies with superior fundamentals, .
Have a good evening,
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.