Stocks winged higher yesterday as a growing number of bulls were encouraged by solid earnings. Housing starts and new building permits have fallen for 3 straight months indicating that Fed rate hikes may be biting – that’s OK – they are supposed to do that.
Earned respect. It’s hot, hot, hot! It is hot everywhere. It was nice to come in from the heat and bathe in a nice screenful of green numbers yesterday, wasn’t it. Are you wondering what it was that caused such an upswing in the market? Well, we are just getting up to speed in Q2 earnings season, so that could be a factor. Just around ~10% of the S&P’s market cap has reported thus far and the results have been encouraging. Some 60% of those companies that have reported have beaten estimates. What’s more, those companies that have beaten have outperformed the broader index in the wake of their announcements. That is a good sign as well. Notice that I used the phrase “on average”, so that means that there are some exceptions. International Business Machines (IBM) is one of those exceptions. After Monday’s close, the company announced that it beat EPS and Sales estimates solidly. Despite the strong performance, the stock tumbled in the premarket, as reported here yesterday morning, and could not recover through yesterday’s solid rally session. IBM ultimately closed down by -5.25%, which may appear as being odd for a company that just announced such a beat. The reason for IBM’s decline was its outlook. Also reported here yesterday, IBM warned of weaker cash flows in coming quarters resulting from loss of business in Russia and the strength in the dollar. So, a weaker outlook soured the positive announcement. What’s more is that IBM is favored by many investors because of its strong credit rating and its solid ~5% dividend. Less cashflow may challenge the company’s ability to continue to grow or even pay its dividend in the future. The stock’s performance after the announcement underscores the importance of not only paying close attention to earnings announcements, but also the importance of researching beyond the headlines.
Of course, there are many more factors involved in a stock’s post-earnings performance. In some cases, investors – not analysts – are expecting the worst out of a company that they are watching. That is reasonable considering the stock market’s recent performance and the raft of chilling economic news that has been circulating recently. In this type of environment, even if results miss analysts’ estimates, investors may rush in to buy a stock on sale, assuming that the results were not outright ugly. Even with market some -18% below their high, stocks can hardly be considered cheap. The most broadly used valuation heuristic is the oft-quoted P/E (also referred to as PE or price to earnings) multiple. In 2020 and 2021 the PE of the S&P 500 clocked in at 30.33x and 24.63x. You will hear many people referring to the historical mean PE of the S&P500 being somewhere around 16x, but that can be misleading. If we look back over the past 10 years, the number appears to be significantly higher. From the chart below, we can see that the PE trended higher from 2012 on to a Q1 2021 peak. We can also note how that multiple has dropped precipitously from its peak to where it is today at 19.88x, well in line with the multiple in the years prior to the pandemic.
So, compared to the long historical mean of the S&P’s PE, stocks may not be considered cheap, but it is clear that the frothy valuations that were common throughout the pandemic rally have now abated, making stocks more attractive, based on value. As we take in the steady stream of earnings over the next few weeks, we know that A) it is important to pay attention to them, B) we need to read below the headlines for future guidance, and C) good is good but bad may also be good…if it’s not too bad. Pay attention.
WHAT’S SHAKIN’
Netflix Inc (NFLX) stock is trading higher by +5.95% in the premarket after it announced that it beat EPS estimates by +25.24% but missed on Revenues. The reason for the positive response is that the company announced that it lost only 970,000 subscribers, though analysts were expecting a great 1 million subscriber loss. The company cited its recent Stranger Things season release for the better-than-expected number. Potential average analyst target upside: +25.9%.
Bath & Body Works Inc (BBWI) shares are lower by -8.37% in the premarket after it updated its guidance. Though the company is not due to report earnings until August 18th, it released a statement lowering current quarter and full year guidance to show a sales decrease from last quarter and a year ago, though the company previously expected single-digit growth through those periods. The company cited high inflation impacting operations as well as customers. Dividend yield: 2.65%. Potential average analyst target upside: +80.0%.
ALSO, THIS MORNING: Elevance Health (ELV), Biogen (BIIB), Nasdaq Inc (NDAQ), and Abbott Laboratories (ABT) beat on both EPS and Revenues. M&T Banks (BTM) and MarketAxess Holdings (MKTX) beat on EPS and missed Revenue targets while Baker Hughes (BKR) came up short on both fronts.
YESTERDAY’S MARKETS
Stocks rallied yesterday as optimism from solid earnings emboldened buyers. The S&P500 rose by +2.76%, the Dow Jones Industrial Average advanced by +2.43%, the Nasdaq Composite Index traded higher by +3.11%, and the Russell 2000 Index traveled higher by +3.5%. Bonds slipped and 10-year Treasury Note yields added +4 basis points to 3.02%. Cryptos added +7.72% and Bitcoin rose by +8.45%.
NXT UP