Earnings Season Is Going Well

Big Tech Earnings Are Upcoming

The next most important round of earnings results I will be following is from the major internet names which are Amazon, Apple, Alphabet, Microsoft, and Facebook. Microsoft reports on Thursday, Apple reports on July 31st, and the others report next week. They will impact the Nasdaq more than Netflix did since they are all larger companies. Earnings season explains the bullish argument the clearest because it adds in the benefit of the tax cuts with the overall economic momentum. There are inklings of economic weakness, especially abroad, but you must parse through data to see them. If a firm had great earnings and sees economic momentum in its end markets and GDP, it won’t be parsing anything to find the bearish case. It’s up to investors to find the bearish case even if they are bullish.

Great Earnings Results So Far

The charts below show aggregate EPS and sales growth rates for the first 39 firms that have reported earnings in Q2. Since this is a decent chunk of earnings reports, the results are near where the actual earnings end up. Keep in mind, the order of earnings season is almost the same every quarter. The banks and the consumer staples report in the beginning and the big internet firms report towards the middle of earnings season. The only difference is the new firms added to the index report at different times than the firms they replaced did. As you can see, Q1’s first 39 firms had monster quarters as the EPS growth was 30.39%. I have been expecting Q2 to have slightly lower growth than Q1. Then Q3 will have the highest growth. Finally, Q4 will have a sharp draw-down in EPS growth.

Keep in mind that earnings growth is weighted by the size of the earnings which means the big internet names will have a huge impact on the overall growth rate. More importantly, they will have a big impact on the direction of the market since they have led it higher. Even the smaller Netflix, shows us how the consumer might be doing. A Netflix subscription is a small purchase per month, but the changes in net adds give incite into the health of the consumer because it is so prevalent. The firm now has 130 million subscribers. The weakness in real wages probably had an impact on subscriber growth. As you can see from the bottom chart above, the sales growth from the first 39 firms shows similar information. Growth is 0.9% lower than Q1. This is still high enough for the market to power higher, which is why it did in 2017. The Q4 2018 earnings estimates are guiding the current market.

The table below goes into the sector specifics of the 39 earnings reports which have come out so far. As you can see, the average EPS surprise is 6.41% which is above average. Real estate is the only sector with negative numbers, which were only caused by one company. 87% of firms beat their estimates and only 10% missed their estimates. This high growth has occurred even while the consumer staples sector has the highest percentage of firms reporting results. So far healthcare, industrials, and consumer discretionary have perfect beat rates.

The second table shows the results from the sales reports. As you can see, once again 87% of firms have beaten their sales estimates. This is more impressive than the 87% EPS beat rate. The 3 year average EPS beat rate is 77% and the 3 year average sales beat rate is only 61%. Therefore, earnings are running 10% above average and sales are running 26% above average. Tech has the highest earnings growth and consumer discretionary has the highest sales growth. Amazingly, 5 of the 7 sectors with firms reporting have above 20% EPS growth and 5 have above 10% sales growth.

The financials have a big discrepancy between their earnings growth and revenue growth as sales are only up 4.7% and earnings growth is up 36.8%. This is because the traditional banking segment isn’t doing well as the curve is inverting and demand for loans is low. CD rates are increasing quicker than mortgage rates in some instances. The banks like when the Fed raises rates, but they don’t like a flat curve. The best instance is when the Fed is hiking or rates are just high and there’s no flattening. The table shows the tax rate is 20.18% which is very close to the corporate tax rate which is 21%.

The bottom portion of the tables shows the recent quarters’ results with 39 firms reporting. As you can see, the Q2 2018 earnings surprise rate and the beat rate are the highest in the past year. The earnings growth rate and sales growth rate were the best in Q1 2018. It will be difficult for stocks to do poorly during this earnings season or the next one. Just because stocks fell in Q1 earnings season doesn’t mean good results don’t matter. That was an unusual circumstance where sentiment was coming off a record high. I postulated the possibly that the buyback blackout period may have led to the decline; it’s possible, but after gaining more hindsight knowledge, I think it’s clear it wasn’t the main catalyst of the decline.

Positive Preannouncements Look Strong

Another great aspect of this earnings season is the number of positive earnings preannouncements. As you can see from the chart below, 47 firms have issued positive preannouncements which is the 2nd highest total since Q2 2006. As you can see, the total is 6 lower than last quarter. Tech was the leader as 20 firms issued positive preannouncements which is above the 5 year average of 11.7. Healthcare had 11 and consumer discretionary had 6. The financials had 0, but that’s only slightly below the 5 year average of 1.4. It’s no wonder the Q2 earnings are coming in strong. The only question now is how guidance for Q3 will look.

 

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