Amazon, Apple, Netflix, & Facebook Have Almost Identical Performance

In this article, I will review the latest earnings data as reported by S&P Dow Jones Indices. There was a two-week break in the data as the purveyor of it went on vacation. It’s always great to get a clear view of the bottom up earnings without any filters. Before I get into that information, let’s look at the drivers of this market. The four stocks below: Netflix, Facebook, Amazon, and Apple are responsible for an outsized percentage of the S&P 500’s gains this year. What’s interesting about the chart below is how close all four have performed year to date. There is a high overlap among investors owning each of the stocks. This creates correlation risk, meaning if Netflix stock crashes, it can bring down the other three. The idea that the stock market can be effected by a firm which doesn’t have positive free cash flow is worrisome. Speaking of money losing firms, Tesla stock soared over 3% on Monday, bringing its market cap to over $56 billion. It’s unfortunate that management at Ford is being shaken up partially because of Tesla, since Tesla is an aberration more than an example of a successful business.

Active managers are now 71% overweight the FANG stocks which are Facebook, Amazon, Netflix, and Alphabet. The chart below shows the weightings of other categories. Without tech, the S&P 500 has barely moved this year. It’s interesting to see how active managers are barley overweight tech when you take out the stocks I just mentioned and Adobe and Broadcom. It’s becoming an oxymoron to call fund managers active when they’re all crowding into the same trades. This is why investors are moving to passive investing and running their own accounts as they can buy Amazon stock on their own without paying someone. Now returns look great using this simplistic strategy of buying the top tech firms, but it will look very bad if some of them falter.

As with the University of Michigan consumer survey, the Conference Board survey showed moderate weakness, but still was a solid report. As you can see from the chart below, the confidence index fell from 119.4 in April to 117.9 in May. The expectations index fell from 105.3 to 102.6. There’s nothing in the details of the survey which stands out to me. I’ve been expecting sharp declines in consumer confidence in May. I have been wrong as the declines have been modest. I’m still looking for further weakness because of the uncertainty about the GOP’s fiscal plans getting through Congress and because they are still historically positive.

Moving on to the latest earnings results, my last two articles which discussed the latest results from Q1 used the data from FactSet which is operating results. FactSet has great charts, but S&P Dow Jones Indices has better numbers. As of May 22nd, 95.7% of firms reported Q1 earnings. The trailing twelve-month earnings are now $100.40 for the S&P 500 which is down 5.2% from the peak in Q3 2014. The S&P 500 is up 19.7% in that period. On the bright side, Q3 2017 is expected to show record high trailing twelve month earnings. I think buybacks are going to start accelerating at the end of the year which will provide a boost to earnings. There was a reduction of buyback’s impact on the Q1 earnings, but earnings still had a 4% tailwind from them.

Since the last time I did an article with S&P Dow Jones numbers, Q1 operating margins have fallen. I consider this a good sign because it means they have more room to rise in the future. Q1 2017 operating margins are now 9.91% which is below the Q3 2014 peak of 10.10%. I still believe that margins cannot go much higher than the prior peak. I estimate there is a hard ceiling at about 10.50%. I think the bulls want the next few quarters to show solid growth and then 2018 earnings to be lifted by tax cuts.

The difference between now and early 2016, when a recession was averted, is that the Fed is raising rates much quicker. On the other hand, the current economy is also stronger than it was in Q1 2016. Using the difference between the 10-year yield and the 2-year yield, I will say the next recession looks like it will occur in early 2019. The difference is 93 basis points and falling. Usually it will fall to inverted prior to a recession.

The top down earnings data is much different from the bottom up analysis which I focus on. The BEA says corporate earnings growth was 3.7% year over year in Q1. This differs greatly from the 26.9% growth shown by the bottom up estimates. It’s not that the bottom up earnings are biased to the positive side. It appears the bottom up results are more volatile than the top down BEA report. As you can see, the BEA report showed corporate profits dipping about 10% during the earnings recession on a year over year basis. The bottom up report shows the worst year over year dip was 15.4%. I trust the bottom up report more than the top down because the bottom up numbers that I look at are actual GAAP results. We are in a temporary period where the two have diverged, but tougher comps will moderate the growth shown by the bottom up reports. Its estimated that growth in Q2 will be 21.9% year over year. The further the estimates go out, the more bearish I am. The one saving grace will be the tax cuts and repatriation tax holiday.


The stock market is being powered higher by a few tech stocks. In terms of the concentration asset managers have in these stocks, it’s very concerning. However, for now (besides Netflix and Tesla) these firms are very profitable which means there’s no sign of a crash in the near-term. Just because everyone is long a few stocks doesn’t inherently mean they are bad investments. There still needs to be a catalyst to bring them lower. Earnings season is in 2 months which means there likely won’t be a sharp turnaround in the meantime.

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