Can S&P Earnings Growth Continue on its Blazing Path?
As we shared last week with Tematica Research Members in our Tematica Investing report, the day to day movement in the market was predicated on the tone of corporate earnings reported the night before and early that day. The Friday before last, General Electric (GE), Proctor & Gamble (PG) and Honeywell (HON) weighed on the market. That same downward pressure continued on Monday following results from Whirlpool (WHR). On Tuesday, positive quarterly results from Caterpillar (CAT) and 3M (MMM) had the major market indices retracing their way higher only to see the S&P 500 and Nasdaq trade lower on Thursday. Following stellar earnings beats by Connected Society company Amazon (AMZN) and Asset-Lite company Alphabet (GOOGL), both of which are on the Tematica Investing Select List, all three major market indices moved higher on Friday.
If it weren’t for Friday’s pop in both the Nasdaq Composite Index and the S&P 500’s move higher on Friday as well, both of those indices would have closed last week in the red. What this tells us is the market is likely to be somewhat schizophrenic in the days ahead, reacting to the news of the day. With more than 2,000 companies reporting over the next 10 trading days, including a number of high profile companies like Apple (AAPL), Facebook (FB) and Starbucks (SBUX) to name a few, odds are we will see the market continue to move back and forth between losses and gains near-term.
Complicating matters somewhat, oil prices are trending higher, the US dollar is overbought and the Euro is oversold – generally speaking that sets up a weak pattern for U.S. equities. Also, too, the coming week will be an even busier one than last week, given the uptick in the number of corporate earnings reports and the beginning of October economic data. All this as we get ready to close the month of October, one that so far has been stronger than expected for the market, and break out the Halloween candy in the process.
Here’s what we’ll be watching over the next five trading days:
On the Economic Front
Following Friday’s initial 3Q 2017 GDP print of 3.0%, which was better than expected by many across Wall Street, all eyes will now begin to focus on the economy’s prospects for the current quarter. As this week progresses, we’ll begin to get the initial October data that will bring that GDP figure into focus, including the October ISM Manufacturing Report, October Auto & Truck Sales, and several employment reports including the one from the Bureau of Labor Statistics.
Before all that gets started, early in the week, we receive the Personal Income & Spending report for September, and this will be one we watch closely over the next few months as we gauge holiday shopping reality vs. the current crop of forecasts.
We also have the Fed’s November FOMC meeting and subsequent press release. We expect the herd to once again dissect, cleave, parse and more the wording to determine if the Fed remains on track to boost interest rates at its December meeting, or if it’s likely such action will be pushed into 2018. With Fed Chairwoman Janet Yellen now a lame duck, we suspect she is likely to put a final mark on things before her soon to be named replacement arrives in office.
On the Earnings Front
Last week we had 850 companies report their earnings, including 189 in the S&P 500. That brings the total number of S&P 500 companies that have reported 3Q 2017 results to 274, which means we have just under half of the S&P 500 companies to go. Coming into the week, consensus expectations for S&P 500 earnings stood at effectively $131 for this year, rising 11.5% to $146.09 – that’s the fastest level of earnings growth for the index since 2011… if it occurs. As we’ve seen over the last few years, lofty earnings expectations for S&P 500 tend to get hit with gravity during the year. We strongly suspect the robust 2018 forecast hinges on tax reform. With details on that yet plan to emerge, however, we could see tax reform slip into mid-2018 before too long.
As we mentioned above, each day last week the days’ earnings results headlines generated the market’s move that same day. As the pace of earnings reports picked up, we’ve seen the S&P bob and weave, but finish the week higher, which in our view stretches the current valuation even further. We see that day to day pattern continuing this week, which will have more than 1,075 companies coming at us. Once again Thursday will be the busiest with 428 companies reporting. Here are some of the reports that we’ll be focusing on:
- How is Mondelez International (MDLZ) embracing the move to low-to no-sugar like PepsiCo and other food and beverage companies, and what is the impact on its sales and profits?
- How is Kellogg (K) fairing as it rides our Food with Integrity investing theme?
- Are rising incomes in developed countries that are fueling the protein complex translating into equipment sales for AGCO Corp.(AGCO) and CNH Industrial (CNHI)?
- Following upbeat earnings from Cashless Consumption investing theme companies PayPal (PYPL) and Visa (V), is MasterCard seeing the same, and when does it expect to launch in China?
- Ahead of the holiday shopping season, what’s coming from Content is King investing theme contender Electronic Arts and how does that mesh with its outlook for the current quarter?
- Is Las Vegas seeing a rebound after the recent tragedy? Results from Guilty Pleasure investing theme contender Caesars Entertainment (CZR) should help clue us in.
- Connected Society and potential Content is King investment theme company Apple reports earnings, and we’ll see how well its new iPhones are selling and if the Apple Watch is taking more share from Fitbit (FIT).
- Facebook continues to monetize its various platforms, but we’ll be looking for more about its plan to move into streaming live video to grab TV advertising dollars.
- Restaurant traffic has been challenging during 3Q 2017, but how does that translate for Fattening of the Population investment theme companies like Habit Restaurants (HABT), Denny’s (DENN), Cheesecake Factory (CAKE), Bravo Brio (BBRG), Bojangles’ (BOJA)
Thematic Signals
Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week. Here are some of the highlights we saw this week:
Connected Society
Nike Brand President States the Obvious: “Undifferentiated retail won’t survive”
While there were lots of details in Nike’s 3Q17 earnings call, one item, in particular, came into focus under our thematic investing lens, at that was the following quote from Nike Brand President Trevor Edwards:
“Undifferentiated, mediocre retail won’t survive. We will be shifting away from this over the next five years.”
We, of course, have been preaching about for some time now about the realities of the struggles facing all brick and mortar retailers, not just sporting goods and footwear retailers. These realities are part of our Connected Society investment theme, which focuses on the way in which we interact with family, friends, co-workers, clients, data is changing alongside the evolving consumer device market with the proliferation of always-connected devices and unlimited high-speed data.
Connected Society/Disruptive Technology
Walmart putting even more robots in more of its stores
Over the last three years Wal-mart has been exploring ways to compete more effectively with the rise of e-commerce, but also help improve its in-store experience for those shoppers that continue to… you know… actually go to a physical store. One of those strategies has been to test robots that would scan the shelves to take note of out of stock items or ones that were miss-priced. Now Wal-Mart is expanding that robot test program, which could help it save on wage costs.
We’re also thinking that in line with our Aging of the Population theme, and something we talked on this week’s Cocktail Investing Podcast, robots may be needed to compensate for the shrinking workforce.
Connected Society
Amazon Reportedly Has Obtained Pharmaceutical Wholesaler Licenses In 12 States
We have seen the creative destruction that Amazon has unleashed on the world of retail and now we are seeing it occur in food & grocery, and soon apparel. Even as Amazon expands its footprint in these markets, it is laying the groundwork for another move into pharmaceuticals. We see Amazon’s underlying logistics business that offers same-day, next day or two-day delivery as a compelling alternative to picking subscriptions up from CVS Health, Rite-Aid, Walgreens, Walmart, the local grocery store, such as Kroger and Albertsons, or even from other online vendors.
Disruptive Technology
Apple Powers Up its Wireless Charging Plans with an Acquisition
Apple (AAPL) has historically done a very great job of expanding its capabilities by cobbling together a series of nip and tuck acquisitions in order to bring its solution to market at the right time. At its most recent iPhone event, Apple teased it would be bringing wireless charging to the iPhone and Apple Watch in the coming months. We’re slowly seeing wireless charging emerge in the real world, but the looming question is what business model will emerge that induces establishments like Starbucks (SBUX) to deploy such solutions?
We see the acquisition of PowerbyProxi laying the groundwork for Apple to wirelessly charge the majority of its devices and who knows how this could factor into Apple’s autonomous vehicles plans better known as Project Titan?
