81% Of S&P 500 Firms Have Beaten Q4 EPS Estimates

Very Slight Increase On Wednesday

Wednesday’s action was interesting. Mostly because the market’s morning gains were quickly wiped away in the afternoon. Especially as it looked like a real selloff was coming. However, the market rebounded in the last few minutes. Many were expecting the beginning of the sharp decline that we've waiting for, for weeks, but nothing came of it. 

Specifically, the S&P 500 fell 0.5% from its peak to its trough at about 3:35PM. Then, right after it went negative, it rallied quickly, gaining 0.24% in 25 minutes. It closed up 0.19%. Tesla never rebounded as it closed down 3.61%. And the infamous Beyond Meat fell 8.52% after rising 56.92% in slightly over a week. Apple fell 0.43%. These aren’t massive declines compared to the recent rallies, especially for Apple, but it seemed like the start of something bigger.

Inflation Driving Valuations?

It seems clear that low inflation and rates have correlated with higher valuations. That makes some less concerned about the current high multiples. As you can see from the table below, the S&P 500’s average trailing PE ratio rises with lower inflation. This data goes back to 1950. When core inflation is below 2.5%, the average trailing PE ratio of the S&P 500 is 21.1. 

Current PE ratio is about 22. Therefore, the stock market is only a little more expensive than average. I prefer to review the forward PE ratio which is above its 5 year average, making analysis on the trailing PE insufficient. 

Details On Wednesday’s Action In Markets

CNN fear and greed index fell 4 points to 86 which is still extreme greed. It probably fell because of the more swift than usual action in markets. We still didn’t get a move greater than 1% in the S&P 500. I suspect one will come to the downside by the end of the month. Year to date it is up 1.81%. 

Nasdaq was up 8 basis points. It declined 0.68% from its peak to trough, but also rebounded in the last few minutes of the day. VIX was up 3 basis points which makes sense because of the modest afternoon volatility. Russell 2000 rose 0.4% as it continued its latest trend of outperforming the big cap indexes. Personally, I still think it will hit a new record high this year.

Worst 2 sectors were energy and the financials which fell 0.67% and 0.55%. It’s unusual for the financials to do poorly while the Russell 2000 rallies. Best sectors were healthcare and the utilities which rose 0.85% and 1.41%. Following the Democratic debate, the odds of Biden winning increased to 40% and Sanders’ odds fell to 30%. Sanders only has a 44% chance of winning Iowa, while Biden has jumped to 34%. 

Utilities rallied because the 10 year yield has recently been falling. It was 1.85% on Monday and now it’s at 1.79%. 2 year yield is 1.56%. Odds of a rate cut in 2020 are 54.9%. If there is a cut, it won’t be in the first half of 2020. I don’t see one occurring at all.

Apple has fallen 1.77% in the past 2 days, but I’m still bearish on it. Charts below show how overbought Apple was as of Tuesday’s close. Apple’s weekly RSI has only been this high 1 other time in the past 3 decades. That was in 2004. Its price is 36% above its 1 year average. It is trading 1.7 times its 52 week standard deviation. It got way too overheated. Even if it has solid earnings on January 28th, it still might selloff. The biggest company in the world has been trading like a microcap name.

Citigroup’s Q4 Earnings

On Tuesday Citigroup’s stock was up 1.56% because of its earnings and revenue beat. It reported $1.9 in EPS which beat estimates by 6 cents. It had $18.378 billion in revenues which beat estimates for $17.855 billion. 

Fixed income trading revenue was $2.9 billion which more than doubled estimates for $1.24 billion. That was 49% growth. On the other hand, equities trading revenues were down 23% as they were $516 million which missed estimates for $673.7 million.

Wells Fargo Is Still In Trouble

Even though Wells Fargo’s issue where it opened fake accounts for customers was in 2016, the bank is still struggling. It had EPS of 93 cents which missed estimates for $1.12. It reported revenues of $19.86 billion which missed estimates for $20.14 billion. 

Profits fell 53% to $2.87 billion because of $1.5 billion in legal costs related to the fake account issue. Its stock has fallen 7.27% since it reported these results. Because of the recent rate cuts, its net interest margins fell 13 basis points to 2.53%. Net interest income fell 11%.

Key Q4 Stats

The start of Q4 earnings season has been solid. As you can see in the chart below, of the first 31 firms to report results, 81% beat EPS estimates and 65% beat sales estimates. Non-GAAP EPS growth is 2.18% and sales growth is 3.48%. GAAP earnings growth is -7.79%. 

If you’re looking at GAAP results excluding buybacks, this has been an earnings recession. I think the earnings recession will end in 2020.

Conclusion

S&P 500 hit another record high on Wednesday, but there were some cracks under the surface. Apple especially is overdue for a correction. If you can’t sell stocks, you should at least get out of the high beta cyclical names. A correction is coming. It might happen during earnings season like 2 years ago even if earnings end up being fine. 

If stocks crash in the next 2 weeks, buy the stocks of the firms that beat estimates. Those stocks might be down on good results which is a temporary mistake by the market. 

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