Friday, February 23, 2018

Earnings Growth Matched The Rapid Pace of Equity Appreciation in 2017

Summary: S&P sales grew 9% over the past year, the best growth in 6 years. Earnings rose 23%, the best growth in 7 years. Profit margins expanded to a new all-time high of 10.8%. Overall, corporate results in the fourth quarter were very good. Earnings during 2017, in fact, rose as much the SPX index itself.

The outlook for 2018 appears to also be strong. "Baseline" economic growth is about 4-5%. The dollar is depreciating, which could add another 3 percentage points to growth. The new tax reform law, passed in late 2017, is expected to add another 7 percentage points. Finally, rising oil prices are a tailwind for the energy sector. As a consequence, the consensus expects earnings to grow 18% this year.

Where critics have a valid point is valuation: even excluding energy, the S&P is now more highly valued than anytime outside of the late 1990s. With profit margins already at new highs, it will likely take excessive bullishness among investors to propel equity price appreciation faster than earnings over the next few years.

Bearish pundits continue to repeat several misconceptions. In truth, 90% of the growth in earnings in the S&P over the past 8 years has come from better profits, not share "buybacks." The S&P's price appreciation has been primarily driven by better earnings (60%) not higher valuations (the remaining 40%). The trend in "operating earnings" is the same as those based on GAAP.

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86% of the companies in the S&P 500 have released their fourth quarter (4Q17) financial reports. The headline numbers are very good. Here are the details:


Overall quarterly sales are 9% higher than a year ago. This is the best sales growth in 6 years (since 2011). On a trailing 12-month basis (TTM), sales are 7% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.

Wednesday, February 21, 2018

How We Work. And A Thank You To Everyone Who Contributes

Our mantra has always been to 'read widely but form your own opinion.' Your investment decisions reflect your risk tolerance, your demographic and financial profile and your personality. Be well informed and take responsibility for the decisions you make.

This blog borrows heavily from those whose research we value. 30 years ago, analysts worked primarily in silos. The information technology age revolutionized the collection and dissemination of data. Work that took weeks can now be done in hours. Original research is quickly amplified, modified and personalized. The Fat Pitch would not exist if it were not for the generosity and intelligence of those around us, to all of which we owe enduring thanks.

We attribute every source. If they are mentioned in these pages, it is because we read their work every week and value their insights. Readers are recommended to go to these sources directly. We can only scratch the surface of their excellent analyses.

Data is no longer very unique. Almost any chart or table we have shown here can easily be found on-line from multiple sources. Original analyses certainly exist, but are rare; in almost every case, the author learned from others generous to share their work. This is exactly how the level of discourse becomes elevated over time.

30 years ago, data alone was an edge, but not any longer. We believe (and hope) that interpretation of the data provides differentiation. We often reach a different conclusion than other analysts looking at the exact same data. How you collect, frame and interpret a pool of analyses is the difference between data and information.

Readers are welcome to copy, modify and personalize any data on this blog. Please retain the attribution to the original source, as we have done. This is a courtesy, not a legal requirement, as the analysis and representation (in a chart, table or graph) of data and facts is not subject to copyright laws, regardless of the effort required to present them (explained here). "Fair use" laws also allow for the reproduction of copyrighted material without the permission of the author for the purposes of commentary, criticism, scholarship, research or news reporting (explained here).

Charts and tables are building blocks. Make what you do with them value added. That makes all of us smarter (below from Ben Carlson).

A partial list of market-related websites we value can be found here.

Not everyone maintains a website, so two recommended Twitter Finance lists are here and here.

If you find this post to be valuable, consider visiting a few of our sponsors who have offers that might be relevant to you.

Monday, February 19, 2018

Weekly Market Summary

Summary:  After falling into their first correction in two years, US equities regained half of their loses in just 6 days. The rebound has been strong enough and persistent enough to suggest that it has further to run. Sentiment and volatility backwardation support that view. However, a low retest over the coming weeks is still a viable risk.

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In just one week, US indices regained about half of their losses during the prior two weeks. SPX gained more than 4% and NDX more than 5% (from Alphatrends). Enlarge any chart by clicking on it.

Monday, February 12, 2018

After a 10% Drop, Will Equities "V Bounce" or Double Bottom?

Summary:  Corrections during bull markets have had a strong propensity to form a double bottom. Since 1980, only 16% of corrections have had a "V bounce" where the low was never revisited.

The current bull market has been different. Since 2009, about half of the corrections have had a "V bounce." So what happens this time?

Sentiment can be reset through both time and price. It's a good guess that if price recovers quickly, sentiment will again become very bullish, making a retest of the recent low probable. A slower, choppier recovery will keep investors skeptical, increasing the odds that the index continues higher.

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Our weekend article summarized the outlook for US equities following the first 10% correction since early 2016 (read it here).  Prior swift falls of this magnitude have led to quick recoveries that eventually retested prior highs. That view is further supported by the washout in breadth, volatility and several measures of sentiment. Overall, risk/reward appears heavily biased towards upside in the near term. The strong rally today seems to support that view.

But our article also showed that while equities sometimes "V bounce", they more often form a double bottom as the strong down momentum is worked off over time.

This article provides 25 examples of roughly 10% falls in SPX over the past 38 years to demonstrate the strong propensity of the index to form a double bottom. We have not been a slave to the fall being at least 10% and we have deliberately excluded examples from the four bear markets where equities were clearly trending downward.

In the charts below, a red arrow is the initial 10% fall and the green highlight is the retest of the low in following weeks. 84% of the corrections have had a low retest (or a lower low).

There are 4 cases (16%) marked with a green arrow showing the initial 10% fall to also essentially be the low (a "V bounce").

While the "V bounce" has been rare, it's notable that 3 of the 4 cases since 1980 have taken place during the current bull market. If you just consider the past 9 years, the odds of a "V bounce" are a coin toss.

So which happens this time?

Sentiment turned very bearish during the past two weeks. It's a good guess that if equities now quickly recover, and if sentiment also quickly becomes very bullish, then a retest of the recent low is probably ahead. A slower, choppier recovery will keep investors skeptical, increasing the odds that the index continues higher. Enlarge any chart below by clicking on it.


Saturday, February 10, 2018

Weekly Market Summary

Summary:  After gaining more than 7% by late January, US stocks have fallen into a 10% correction. It's the quickest decline of that magnitude from an all-time high in 90 years. While a fall in stocks was not a surprise, the speed and severity certainly were.

So what happens next? Prior falls like this have led to quick recoveries. That likelihood is further supported by a washout in breadth, volatility and several measures of sentiment. Moreover, the fundamental backdrop remains excellent. Risk/reward is heavily biased towards upside in the near term.

That said, strong down momentum normally reverberates into the weeks ahead. Equities sometimes "V bounce" but more often form a double bottom. A low retest in the not too distant future remains a greater than 50% probability. The longer term outlook for US equities is unchanged and favorable.

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Two weeks ago, all of the US indices made new all time highs (ATHs). SPX and DJIA were up 7% and NDX was up 10% YTD. VXX, the ETF based on the VIX, was down for the year (the next two charts from Alphatrends). Enlarge any chart by clicking on it.

Friday, February 2, 2018

February Macro Update: Employee Compensation Rises To A 9 Year High

SummaryThe macro data from the past month continues to mostly point to positive growth. On balance, the evidence suggests the imminent onset of a recession is unlikely.

The bond market agrees with the macro data. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (arrows). The lag between inversion and the start of the next recession has been long: at least a year and in several instances as long as 2-3 years. On this basis, the current expansion will likely last through 2018 at a minimum. Enlarge any image by clicking on it.