From today’s Lunch With Dave:
Over half the S&P 500 have reported (304 to be precise) and so far the season
has been rather jolly with 75% beating bottom-line estimates and even 63%
doing likewise on the revenue line – both above average (of 70% and 60%,
respectively in recent quarters). It now looks like EPS growth is going to test
+50% YoY, which is impressive indeed. Companies are retaining more than 10%
of their profits (post all operating costs), which is good news for bondholders,
that is for sure.
So why isn’t the equity market reacting better? A few reasons:
First, a lot of this good news was already priced in to begin with.
Second, the second quarter is a bit like ancient history right now – guidance has
not been that good with three companies providing downbeat assessments for
the coming quarter for every one that had something positive to say about the
near-term outlook. Over the long-term, that negative-positive ratio is generally
closer to two-to-one than three-to-one .
Third, analysts have stopped raising their estimates for the year – in fact, for
every one that is doing so there is another one who is cutting forecasts. The
future is muddled despite the nice things we see through the rear-view mirror,
which is why the equity market has been in this tug-of-war lately. When the
market was strengthening to the April highs, one of the catalysts at the time was
that analysts were coming out of the Q1 reporting season at that time upgrading
their EPS estimates three times faster than they were cutting forecasts.
Fourth, while revenues have been above expected, they are running at about
one-fifth the pace of profit growth and as a result margins are hitting new highs.
What happens when they begin to compress (especially with 80% of the
incoming economic data disappointing over the past month)?
Fifth, with the monetary and fiscal policy stimulus behind us, we can see what
the economy looks like – back-to-back declines in retail sales, durable goods
orders and shipments, and household employment. Not to mention consumer
and producer prices.
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