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Morning Commentary

Earnings Season Is Upon Us

By Charles Payne, CEO & Principal Analyst
10/10/2017 9:38 AM
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A wave of financial releases this week from big banks, including:

They all traded down on Monday due to a downgrade that sent Goldman Sachs lower as anxiety builds ahead of earnings news. There are three reasons why investors are worried about this earnings season: 

A. The last round of earnings was amazing with 69% of S&P 500 names beating on revenue and 73% beating on earnings. And yet, on average, companies that beat saw their shares trade lower on the news.  It was the first time since 2011 that the good news was greeted with knee-jerk selling. 

Ironically, while it was frustrating, I think stocks nose-diving on good news was good news. It removed the notion of blind optimism or irrational exuberance.  And it wasn’t about guidance because more companies issued upside guidance than usual.  This brings us to the second concern going into earnings season.

B. Lowered expectations: at the end of the second quarter (June 30), blended third-quarter earnings were modeled to grow by 7.5%. It came down to 5.0% a month ago and has dropped  to 2.8%. 

Typically, lowered expectations are a good thing since it makes for easier hurdles.  It’s really a game where management sandbags its own numbers, and then analysts do the same, as everyone is afraid of being wrong on the high side.

However, I’m confident earnings will come in significantly better than expected. More importantly, we’ll continue to see year-over-year improvement in revenue and earnings.

C. Valuations are another big concern that mostly focuses on the price-to-earnings ratio.  This popular valuation metric has probably cost more investors’ money than any other. Sure, when we begin talking a forward price-to-earnings in the mid-twenties or higher, it’s a red flag. Many of the best-performing stocks in the market change hands at higher price-earnings (P/E) ratios.

For now, I think we need strong results and more confident guidance to justify valuations. For those who missed this rally because of headlines over PE ratios, you’ve missed several trillion dollars in valuation that have added to our markets over the last few years, including five trillion since the election of President Trump.

Earnings Highlights

While expectations are too cautious, the Street is looking for a massive top and bottom line growth for multinational companies that do more than 50% of business outside the United States (OUS).  A combination of the weak dollar and outsized growth has the Street looking for close to eight percent growth on the top and bottom lines.

3Q17 Financial Estimates

Rev

EPS

  • 50% USA

3.8%

UNC

  • 50% OUS

7.7%

7.9%

 

I’m pumped about this earnings season sparking the next leg higher in this rally.  Make sure you have cash, even if it means cleaning up some laggards ahead of time.

Market breadth saw more decliners than advancers. New 52-week highs swamped 52-week lows. This is the stock market calm before the (earnings) storm.

Market Breadth

ADV

DEC

Highs

Lows

NYSE

1,256

1,613

197

29

NASDAQ

1,145

1,703

202

27

 

Today’s Session

The market opened higher on a mix of momentum stocks and some value shopping. 

Momentum

NVidia is going to rocket out – so much for that massive attempt to crush the shares.  Other momentum darlings like Telsa look higher, too.

Value

Airlines are finding value money before the open after American nudged their total revenue per available seat mile (TRASM) range for the third quarter.  Keep in mind Delta reports tomorrow.

Breakout

Walmart looking to open at highest level since April 2015 after management outlined key goals for FY 2019:

The evolution and broadening of the rally is impressive and gives it credibility that goes beyond hype or emotions.   I think it’s great.

 


Comments
I now fully believe that the Republican Party is so uncomfortable being dominant and / or running things ... they they fully intend to give control over to the Democrats. The Republicans ENJOY being the minority and want to get back there.


Hillary Clinton WAS SUPPOSED TO WIN ... but Donald Trump came out of nowhere and beat her.


So the Republicans are determined to give legislative control back over to the Democrats in 2018 ... if not sooner by the antics of John McCain, Susan Collins, Mitch McConnell, and Paul Ryan.


They are screwing themselves ... ON PURPOSE.


Trump will make changes perhaps this week to ObamaCare to make changes " as directed by the Secretary" ... for example ... change 60 days to 364 days and other changes as well.


Perhaps remove the "illegal" removal of Congress, unions and the bureaucracy away from being exempt from ObamaCare.


Best regards,


Al M.

Al M. on 10/10/2017 11:53:28 AM
It has been said MANY TIMES....if ALL of Congress, the lawmakers who pass measures such as Obamacare health care and other laws that affects we common citizens....there would be FAR LESS FAVORITISM shown and SUPPORT given to such legislation. The American people need to RISE UP and DEMAND that all laws/legislation passes by Congress must also APPLY to these very same lawmakers, otherwise we (the people) will CONTINUE to be on the "dirty" end of the receiving stick!
Enough is ENOUGH! No more "special treatment" for ALL of Congress! Apply the legislation they PASS to ALL (across the board) and let's see how THAT changes what is make into law!

James Warlin on 10/10/2017 1:06:42 PM
somebody way back in our history said---------the best way to get rid of a bad law is to enforce it to the max ---- unions and congress PAY UP---NOW

John Cowger on 10/11/2017 1:11:52 PM
Hi Charles. Very glad to see you back. I agree with you and I am very optimistic about the future. I recently cashed out a 500,000 annuity. I have bought alot of the big nasdaq stocks as well as nutanix recommended by you. I have cash in an outside account so I have invested heavily in the market. Before Trump got in I had a 1,000,000 in IRA. It has grown to over 1,200,000 in 10 months. I watch fox businesss every day. Thanks for your info.

sally Baumann on 10/12/2017 9:00:35 AM
 

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