Monday, August 19, 2019

2Q Corporate Results: 2% Earnings Growth Expected in 2019

Summary: Overall, corporate results in the second quarter of 2019 were fine, but growth has slowed. Sales and earnings were up were 5% and 4% yoy, respectively. Margins rebounded from the end of 2018 but are still below the cycle high made in 3Q18.

Looking ahead, analysts' expectations for 10% earnings growth in 2019 have been revised down to just 2%. This estimate will be about right if margins can be maintained at the current level and the dollar doesn't further appreciate, but another drop in oil prices could cause earnings growth to decline towards zero.

For 2020, analysts currently expect growth of 5% to sales and 11% to earnings. This is too optimistic. Assuming no change in the dollar, oil and margins, earnings growth is likely to be halved. Margin compression (likely) would lower growth much more.

Valuations are now back to their 25-year average. They are not cheap, but if investors once again become ebullient, there is room for valuations to expand. With earnings growth likely to be negligible, the key for share price appreciation in 2019 (and 2020) is likely to hinge almost entirely on valuations expanding.

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93% of the companies in the S&P 500 have released their second quarter (2Q19) financial reports. The headline numbers were fine, but growth has slowed. Here are the details:


Quarterly sales grew 5% over the past year, to a new all-time high (ATH). On a trailing 12-month basis (TTM), sales were 7% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.

Friday, August 2, 2019

August Macro Update: Housing Weak But Recession Unlikely In 2019

Summary: The 25bp rate cut by the FOMC this week was warranted given ongoing weakness in housing, but the balance of the macro data remains positive, meaning a recession starting in 2019 is unlikely.

The bond market sees continued but modest growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. The yield curve has not yet inverted; on this basis, the current expansion will likely to last through 2019 at a minimum (from JPM). Enlarge any image by clicking on it.

Thursday, August 1, 2019

High Consumer Confidence Is A Notable Stock Market Warning

Summary:  In July, the Consumer Confidence Index (CCI) jumped to its highest level since last September, right before stocks started a 20% correction. Sometimes a high in the CCI coincides closely with a 5% or greater fall in stocks, but at other times the lag has been many months. In general, however, the risk/reward for investors over the next 6 months has not be favorable.

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In July, the Conference Board's Consumer Confidence Index (CCI) jumped to the highest level since last September. According to the Conference Board: “Consumers are once again optimistic about current and prospective business and labor market conditions. In addition, their expectations regarding their financial outlook also improved."

The CCI was created in 1967, based on a monthly survey of 5,000 households. The report gives details about consumer attitudes (how would you rate the current business and employment situation; do you think your income will be higher or lower in 6 months) and buying intentions.

Increasing confidence is generally good for the economy as it drives consumption, which is 70% of the US economy.

But excessive confidence is not good, especially for the stock market. The timing is far from perfect but risk/reward and forward returns are often poor.

The current CCI is now 136. It has been higher in only 3 other periods: the late 1960s, the late 1990s and last year (the next 4 charts are from Sentimentrader; to become a subscriber and support the Fat Pitch, click here). Enlarge any chart by clicking on it.