Investors: What’s Overlooked is Undervalued
The corporate earnings season has begun stronger than expected.
But let's be realistic; it’s an easy comparison to a year ago.
Many won’t remember that the world was (once again) supposed to be ending back then because crude oil was cheap and gasoline was inexpensive.
Read this from FactSet:
"To date, 6% of the companies in the S&P 500 have reported actual results for Q1 2017. In terms of earnings, more companies (76%) are reporting actual EPS above estimates compared to the 5-year average. In aggregate, companies are reporting earnings that are 6.7% above the estimates, which is also above the 5-year average. In terms of sales, more companies (59%) are reporting actual sales above estimates compared to the 5-year average. In aggregate, companies are reporting sales that are 0.2% above estimates, which is also above the 5-year average."
One of the two busiest weeks of this year’s earnings season is upon us. Over 800 companies are reporting - with 191 from the S&P 500. As of last Friday, we had 95 of the S&P 500 constituents (representing almost 25% of total market cap).
They had reported earnings that are 14% higher than Q1 2016.
Over 72% of them have beaten earnings expectations with more than 62% beating revenue estimates.
In essence the parade continues and it’s picking up pace.
By the way, as the data above shows, the Barbell Economy – where the Millennials of Generation Y are being handed the economic baton from the Baby Boomers - is moving along just fine.
Forward earnings rose last week to more record highs for LargeCap and MidCap. SmallCaps rose too, but remain a tiny 0.1% below their early February record.
The yearly change in forward earnings is up in all three categories:
- LargeCaps forward earnings edged to 9.1% y/y;
- MidCaps rose to 11.3%; and
- SmallCaps sat at 12.1%.
Keep in mind folks that this is before any tax changes for 2018 are incorporated into the plans.
More Good Stuff
While we all get lost in whether or not the French election is bad for us, good things continue to flow in the US:
- The Philly Fed remained strong, with a reading of 22. This is especially good for a diffusion index, which measures month-over month changes. We cannot expect the pace of increases to be maintained. Few understand this and fewer mention it.
- Port activity is increasing - along with truck movement – which is usually a very good sign and follows solid Industrial activity.
- Initial jobless claims rose to 244K, which some may see as bad. Most follow this noisy series via the four-week moving average, which moved lower.
- Chinese economic growth was 6.9%, beating expectations – keep in mind though that when considering Chinese data on the surface always keep an eraser close by).
In summary these (and other) factors continue to suggest the economy is, well, doing just fine.
The even better news is that we are not seeing significant inflation pressures that would be driving rates higher - often a very early sign of something being stressed. We simply do not have that reality unfolding.
Last of all, earnings as a per cent of GDP data is at its highest level in my lifetime, and the season isn’t even half way complete.
Here’s one final crazy thought: The process by which GDP is being reported to us as a whole was created over 60 years ago, and the odds are increasing (rapidly) that, given time, we may find government GDP and productivity reporting was simply no longer giving us a true picture of activity and growth.
So, if you feel the need to fret over something that would be a positive thing about which to do so.
The media red ink to end last week was blamed on the French election question.
Yet, the market’s move up was also blamed on the French election.
Folks, there’s still no answer to the French election.
What’s even funnier is that just moments after the French election was old news, there was a talking head on a major financial channel saying, "Well, as much as people were concerned about the French election, the real issue is the Italian election a year from now."
There you go.
Let's Close This Out
As a final note on the big picture, the Leading Economic Indicators Index (LEIs) remain positive and growing.
“The March increase and upward trend in the US LEI point to continued economic growth in 2017, with perhaps an acceleration later in the year if consumer spending and investment pick up,” said Ataman Ozyildirim, director of Business Cycles and Growth Research at The Conference Board.
The Leading Economic Indicators Index (LEI) advanced for the ninth time in ten months, by 0.4% in March and 3.3% over the period to a new record high.
March’s advance once again was broad-based. Only two items measured had any negative impact: The average workweek; and jobless claims. By the way, current data already suggests that the latter will now be a positive influence on April’s LEI, as jobless claims sank to 243,000 [4-wk/average] in mid-April.
All of this positive backdrop is unfolding with investor sentiment in the tank.
Some of those reminders are below.
The upshot? Pray for a correction....
Think demographics, not economics.
And try not to make the mistakes so many made in the 1980s when the Baby Boomers were unfolding on this same glide-path early in their careers.
Too many investors overlooked that factor in all the data and got lost in the noise.
The net result?
They missed most of the misunderstood bull market of the 1980s and 1990s.
I respect the scary feelings out there, folks, I really do.
But, if we can't see a real correction over the next few months given all this noise, the terrible Trump ratings, N. Korea fears, China, Russia and all the other media head-fakes, then please take notice; the data suggests the market may be far stronger than many want to accept.