AAPL Beats Earnings Driving The Indexes Up

AAPL (Apple) beat its earnings estimates so its stock soared 4.73% on Wednesday to a record high. This pushed the S&P 500 to the black as it was up 0.05%; the Dow was up 52 points and the Nasdaq was flat. Investors might have been extra aggressive because of the anticipation surrounding the new product releases. Specifically, Apple earned $1.67 which beat estimates for earnings of $1.57. Earnings last year were $1.42, but don’t get too excited by that growth because it has been boosted by buybacks. As you can see in the chart below, revenues were only up 6% year over year. They were $45.41 billion which beat estimates for $44.89 billion. Apple sold 41.03 million iPhones which was slightly above estimates of 41 million.

The FANG stocks have now all reported earnings. As you can see from the chart below, the law of large numbers is catching up to most as their growth rates are slowing. It was a mixed bag in terms of stock performance as Facebook (FB), Netflix (NFLX), and Apple (AAPL) rallied, while Alphabet and Amazon sold off. I have been bullish on stocks for the summer and remain so based on these latest reports.

Moving to long term expectations, the chart below was created by Jesse Felder to show how overvalued the market is. I disagree with the sentiment that this chart promotes which is that the current stock market bubble is about twice as large as the tech bubble. The reason why this chart is showing exponential growth is because it double counts GDP growth. It uses the market cap to GDP to measure valuations and then it divides that number by the 10-year GDP growth rate to get the final metric. GDP growth isn’t a great way to measure stocks because various amounts of earnings come from abroad.

Secondly, dividing that valuation by the 10-year average GDP growth is disingenuous. If GDP growth falls from 3% to 2%, that’s a 50% decline in growth, but should that decline imply that stock valuations should fall by 50%? Stocks should trade on future estimates of cash flows so declining GDP growth in the past shouldn’t matter. I’m not that bullish on future estimates for GDP growth because of declining population growth, however, the situation isn’t that clear cut because estimates can be proven wrong. Whenever you have a chart which such extremes, it’s important to be cautious. I’m not saying stocks aren’t expensive now, but I am saying stocks aren’t twice as expensive as in 2000. The bears can always mess with stats to promote the conclusion they want you to have.

One area which is looking like the 2000s bubble is the private sector jobs growth in the tech sector. As you can see from the chart below, jobs growth in the tech sector has nearly match the 2000s high. The tech sector in the 8th district has surpassed the jobs growth seen in the 2000s. The 8th district is the St. Louis Fed’s district; it includes parts of Tennessee, Indiana, Mississippi, Arkansas, Kentucky, Missouri, and Illinois. This shows that the job growth in technology was principally in Silicon Valley and now it has spread to the heartland. This increase in diversity of geography comes along with much more sustainable businesses. Firms like Apple, Alphabet, Microsoft, and Facebook are cash kings unlike the tech darlings of the tech bubble. I wouldn’t go as far as saying these firms will all sustain their dominance in the next several decades, but I’m confident that these jobs aren’t going away. If Microsoft falters, a new company will pick up the slack because the internet is a new power industry much like railroads were 100 years ago.

On the negative side of the ledger, the hype surrounding stocks has gotten to a point unlike anything I’ve ever seen. Since I started watching the market in 2007, I’ve never seen such unbridled optimism. Even the bears think stocks can only go higher. As you can see from the chart below, the net share issuance of ETFs have maintained their spike up in the past few months. Charts like this usually must be adjusted for inflation, but obviously the over 50% increase in net inflows from the peak in 2015, which matched the peak in 2008, isn’t the result of inflation. Capital is flowing to risk assets which lets firms raise as much money as they need as long as they aren’t named Snap or Blue Apron. I find it questionable that President Trump is promoting the gains in the stock market so heavily. It gives this market a feeling that something is about to break. Overconfidence is the worst signal for the market. This isn’t about Trump specifically as most presidents would mention stocks moving higher. It’s more about the fact that the attention is on stocks like it’s a popular show. Usually the show ends in peril.

Conclusion

Apple took step one in its quest to gain momentum before the iPhone product launch. It’s also getting close to being the first company with a $1 trillion market cap as it’s now at $819 billion. Some investors were too negative on Apple because they scoffed at the 6% sales growth, but that number will improve with the launch of the next iPhone. The 10% decline in China sales is also a big talking point for the bears. The decline came from Hong Kong. It is worth monitoring, but there will always be weak areas.

In this article, I showed why using GDP twice in a metric is disingenuous. It makes it look like the stock market is more expensive than it is. You can value stocks however you want, but if you aren’t using earnings, you are wasting your time. On the bearish side, we have a large increase in equity issuance and a president who is egging on the market. It reminds me of when politicians were telling people how great the housing market was. It’s best to ignore politicians when making financial decisions.

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