Bank Of America Reports Similar Results
On Monday morning, Bank of America reported earnings. This is the last of the big 4 banks to report. The results were similar to the others as earnings beat estimates. Because the stock fell in sympathy with the other results on Friday, it rallied on Monday along with the overall market. The rally probably wasn’t caused by earnings because the stock was down in the morning and didn’t react to the results in pre-market trading. The stock is up 31% in the past year as it did well from September to January.
The firm’s Q1 EPS was 62 cents which beat estimates for 59 cents. Revenue was $23.1 billion versus the estimates for $23.059 billion. Net interest income was $11.6 billion versus the $11.69 billion forecast. Like the other major banks fixed income trading was weak as its revenue was down 13% to $2.5 billion which missed estimates for $2.92 billion. Just like the other banks equities trading was up big because of the volatility. Revenue was $1.5 billion which was a 38% increase. Consumer banking revenue was up 9% to $9 billion as net interest income in this division was up 13%. The firm’s forward PE is 11.7 which is in line with the other banks. The sector looks like it can do well in the next few months with JP Morgan being the leader and Wells Fargo being the laggard.
First Taste Of Q1 Earnings
Earnings season started last week as FactSet’s latest numbers include the results from 6% of firms in the S&P 500. The expectation is for 17.1% earnings growth. Including the average beat rate, the implied expectation is for 20.1% growth. It’s extremely difficult to see a bear market with such high growth. Generally, this level of growth occurs after recessions as comparisons are easy. The last time growth was this high was the 34% increase in Q3 2010. Stocks don’t have the upside they had in 2010 as they were cheaper then, but downside is unlikely.
The table below is interesting as it shows stocks have only increased 2.6% per year when year over year earnings growth was greater than 20%. I don’t think this means stocks will be weak in 2018. It depends on expectations. Since the average beat is implying 20.1% growth, I doubt investors will be disappointed with above 20% growth. If the expectations were higher, I could see a scenario where stocks are weak with above 20% growth.
Another positive tailwind for firms is the weak dollar. The dollar index started Q1 at $91.95 and closed the quarter at $89.94. That’s lower than last year which started at $102.21 and ended at $100.56. This explains why 15 of 25 firms mentioned FX in a positive light and only 7 mentioned it in a negative light. Higher wages and the weather were mentioned negatively 5 times. It doesn’t seem like investors will be that focused on the negatives since +20% growth could be coming.
The most interesting factor I’ll be watching this earnings season is the effect results have on the estimates for 2018 and 2019 full year earnings. Currently the bottom up estimates for 2018 and 2019 are $157.75 and $174.29 respectively. The market has a multiple of 15.4 on 2019 earnings. If you believe these estimates will come close to being reached, you can’t be bearish on stocks.
Stock Reactions To Geopolitical Events
The market sold off last week on the possibility of American led airstrikes in Syria. In an article I wrote on Friday after the airstrikes were announced after the close, I stated stocks might fall in a knee jerk reaction to the news, but you shouldn’t panic. That was good advice, but the prediction was clearly off as stocks increased on Monday. The chart below provides the recent S&P 500 performance after geopolitical events. It explains my point about stocks having a knee jerk reaction down, but eventually increasing. The average initial decline is 2.1%. The average increase is 6.2% in the next 3 months with a 70% win rate. The only time market didn’t recoup its losses within the next 10 days was after Iraq invaded Kuwait in August of 1990. In the current case, stocks fell in anticipation of the announcement and rose after it was announced. It’s possible the timing was important. I think stocks would have fallen if it was announced during trading hours. There wasn’t a chance for an immediate reaction on Friday evening unless you count the illiquid weekend futures market.
Buy Twitter Sell Facebook?
Facebook and Twitter have had the exact opposite level of success in the public market. Facebook had an early blunder after going public, but has since rallied as the Instagram acquisition was a huge success. The mass appeal of its apps has allowed it to gain digital advertising market share and grow profits. Twitter, on the other hand, never reached mass appeal and hadn’t reached profitability until this year because its expenses were too high. The stock is below its first trading day close.
The fortunes of these two social media giants might be reversing. As you can see in the chart below, 32% of Americans think Facebook is having a negative impact on society. Part of this hatred stems from the Cambridge Analytical scandal and part of it probably stems from the way socialization has become digital instead of in-person. If the hatred of Facebook grows, people may not like when firms advertise using the platform. If Facebook become toxic for brands, profitability will be hurt.
As you can see from the chart below, Twitter’s engagement stats have been improving in the past 6 months. The time spent is much more important than monthly active users. Someone could spend 2 minutes on Twitter once and count as a monthly active user. The engagement rebound in 2018 combined with cost cutting is a great combination for profitability for the first time since the firm was founded. To be clear, I’m not saying users are ditching Facebook for Twitter. Facebook users are becoming disengaged, while Twitter users are loving the service lately.
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