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Weekly Update (10-18 : 10-25) - Q3 Earnings Season Begins
· As we begin earnings with a focus on financial services, along with some of the tech companies like Netflix, we are beginning to see some positive signs that earnings are bottoming out.
· With 9% of the S&P 500 having reported so far, 81% of them are beating estimates and are beating those estimates by an average of 6%. Earnings estimates have gone up .9% since 9/30/23.
· Of the companies who have reported, earnings have been up by 10.6% year over year. Overall, the expectation from the remaining 400+ companies is to have flat to slightly down earnings. On balance, this would leave earnings flat for the entire quarter.
· In terms of revenues, companies who’ve reported earnings have had revenues growing Year-over-Year at 6.8%, with the remainder expected to post .9% sales growth. On a blended basis, that would leave earnings season totals with a roughly 1.8% Year-over-year sales growth, when all is said and done.
· In terms of broader context, if this quarter does turn out to be the trough in earnings, it will very much resemble past bear markets, since in past bear markets, nearly 80% of the time, the stock market bottoms out roughly a year before those stocks’ earnings eventually bottom out. Since the market bottomed out last October, establishing a trough in earnings after two consecutive quarters would rhyme with history, and give us more confidence in our thesis that we are not going to re-test the stock market lows of last year.
· This is not to say, however, that it is a sure thing that new highs for the stock market are coming imminently. With the horrific terrorist attack in Israel, and ensuing war in the middle east, headline inflation that appears stickier to the Fed, and interest rates that are testing new highs, the market is grappling with many risks right now.
· Fed rate hike probabilities for November of 2023 have receded to nearly zero. Having said that, there is a slight probability of a December 2023 rate hike. Recently “hot” data from oil increases, as well as robust consumer spending data, may convince the Fed to do another hike.
· However, parsing through the retail spending data, it appears that it is mostly being driven by wealthy Americans, while other consumers are peeling back on spending.
· If we examine the argument of whether or not the Fed would hike rates just because oil is going up, it would not make sense that they would do this since it is not a core inflation element.
· We are also seeing that the Manheim used care index, which is the second largest component of inflation, is down hugely on a year over year basis.
· While risks abound in the market, history has proven time and again that data that is non-fundamental in nature is both impossible to predict, and nonsensical to invest around. It is our firm belief that earnings and cash flow will eventually convince investors that the “Gadot” recession is never coming, and to invest their savings in the market.
· While bonds remain a core part of portfolios, we do believe they pale in terms of attractiveness to the equity markets, which should deliver superior returns of 9-10% over the long-term for investors who remain invested through the cycle.
· Our base case remains that, based on the data science, in “years like this” in which the market goes up 10% by midyear and with the regular seasonal choppiness in August-September, stocks tend to go up 8-9% by year end. So far in the fourth quarter, the S&P 500 is up around 2%.
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