Earnings Octane

Posted: Nov 07, 2017 12:01 AM
Earnings Octane

Last week was all about earnings that mostly smashed expectations. Although the Street was still completely unforgiving to names that missed and/or provided punk guidance, a lot of beats were greeted with selling. However, the big boys stood tall, especially in the tech arena.

The most impressive earnings report came from Apple (AAPL) with a colossal beat Thursday after the close.  Last Friday, investors were fine with chasing names that provided strong guidance. The company is firing on all cylinders.  As for the earnings season thus far, results have been impressive. According to FactSet, 81% of S&P 500 names have reported results:

  • 66% beat on sales
  • 74% beat on earnings per share

Material names have enjoyed the largest average blended earnings beat at (+13.2%); chemical raw materials (+20%), and metals and mining (+14%), followed by information technology. In addition, there was a bunch of great economic data. Factory orders were paced by a 20.8% surge in civilian aircraft orders; a 33.2% jump in ships and boats came in at a headline of 1.4%, beating the Street estimate of 1.2%.

There was also merger mania across several industries, including Big Tech.

Midway through last Friday’s session, Qualcomm (QCOM) surged on a report from the WSJ that Broadcom LTD (AVGO) was preparing a bid for about $70.00 a share. I think that’s a real low-ball number, and I expect Qualcomm to hold out for at least another $10.00 added.

Valuation Concerns

The market is on a tear, so its only natural people are guessing it’s time to pull back.  They assume valuations are excessive, but they aren’t.

Right now, the forward price-earnings (PE) ratio on the S&P 500 is 18.00, which is well above the five year average of 15.4 but it’s nowhere near levels associated with major market crashes.

Still, anxiety abounds with a checklist of worries, including:

  • Stocks soaring
  • Outsize valuation
  • Complacency
  • Merger mania

The market might be ‘due’ for a pullback, but this isn’t blind hysteria. It’s a wonderful moment in time that the market’s anticipation could set the stage for years of economic growth and prosperity.