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Earnings Scorecard:
For the past few years, corporate earnings have been the primary driver behind the relentless rise of US stocks. Through the second quarter, US corporate profit margins were at an all-time high and just before S&P 500 companies began reporting their third quarter earnings, estimates called for continued improvement in profitability. So how have they done so far?
Through last Friday, with 74% of the companies in the S&P 500 having reported actual results, companies are outperforming recent averages in terms of the number of companies reporting positive surprises and the magnitude of those positive surprises. In terms of earnings, the percentage of companies reporting actual earnings per share above estimates (78%) is above the 5-year average.
The blended figure, which combines actual results for companies that have reported and estimated results for companies that have yet to report, year-over-year earnings growth rate for the third quarter is 24.9%. If 24.9% is the actual growth rate for the quarter, it will mark the second highest earnings growth since Q3 2010.
All eleven sectors are reporting year-over-year growth in earnings. Nine sectors are reporting double-digit earnings growth for the quarter, led by the Energy, Financials, Communication Services, and Materials sectors.
The concern for US equity investors, is that something will happen to derail these corporate earnings. There are ample hurdles on the horizon: Rising corporate debt, a rising dollar, rising rates, rising wages, oil prices, trade wars, the list goes on. But despite all that uncertainty, Corporate America continues to shine - for now.
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After a rough October, equities rebounded last week and the small cap Russell 2000 index ended its 6-week losing streak. Notably, value stocks outperformed their growth counterparts. Though investors continue to worry about the impact of tariffs, positive earnings reports helped to steady markets. By the end of the week,
FactSet had raised its estimate of overall year-over-year earnings growth for the S&P 500 to 24.9% - near a multiyear high and almost exactly in line with the pace in the first two quarters of the year.
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> Employment:
The US Department of Labor reported that employers added 250,000 jobs in October, well above consensus estimates. Unemployment remained at the 50-year low of 3.7%. Interestingly, the better than expected report appeared to send stocks lower last Friday as investors worried about the implications of rising wages on overall inflation and profit margins.
> Valuations:
We have been among those warning this year that US equity valuations have gotten frothy. But this latest pullback in the S&P 500, which has been accompanied by rising earnings, leaves the S&P 500 at just over 15 times the next 12 months earnings estimates. The latest forward Price/Earnings ratio is below the 25-year average of 16.1x according to FactSet data.
> From QE to QT:
On In 2008, Central Banks around the world embarked on a practice of quantitative easing (QE), whereby they purchased government securities from the market in order to lower interest rates and increase the money supply. That action was wildly bullish for asset prices and kept interest rates low. Today, central bankers are engaging in the opposite action, quantitative tightening (QT), also known as balance sheet normalization.
The chart below illustrates how in aggregate, central bank purchases from England, Japan, the Fed and the European Union will turn negative next year for the first time in a decade. That signals the reversal of easy money and may bring a return to active management outperformance.
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November 11, 2018, known in this country as Veteran's Day and elsewhere as Remembrance Day, marks a century since the conclusion of World War I. Coinciding with the 100 year anniversary, director Peter Jackson (best known for the Lord of the Rings trilogy) unveiled his passion project, "They Shall Not Grow Old" at the London Film Festival last month.
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They Shall Not Grow Old |
The film mixes previously unseen footage and audio recordings from the Imperial War Museums' film archives with state-of-the-art technology that includes colorized and sharpened images converted to stereoscopic 3D. The result is an immersive film that humanizes the experiences of the young British soldiers who fought in WWI 100 years ago, in sequences that are narrated by the soldiers themselves.
Armed with 100 hours of footage and 600 hours of audio recordings from British soldiers from the BBC archives, Jackson's full-length feature is being called a landmark achievement in making history so palatable for contemporary audiences.
Said Jackson: "I wanted to reach through the fog of time and pull these men into the modern world, so they can regain their humanity once more, rather than be seen only as Charlie Chaplin-type figures in the vintage archive film." Last week, Warner Brothers acquired the international distribution rights to the film so American history buffs and film fans will soon have the chance to see the masterpiece.
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New Market Wealth Management offers modern investment solutions backed by extensive research and experience serving the needs of wealthy families. Through our strategic partnership with
Cliffwater LLC
, we have access to institutional-quality research, investment due diligence and asset allocation tools. We believe this level of experience and unique access to in-depth, sophisticated research are essential for success in today's complex world markets.
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