Earnings Rubber Hits the Road This Week
After steadily inching its way higher over the last few weeks, we are entering the first week where we have a meaningful number of 3Q 2017 corporate earnings. While we will have additional September economic data that we’ll use to weave together our 2017 GDP tapestry and assess the Fed’s likelihood of boosting rates in December following its dovish September meeting minutes, corporate earnings will be the focus.
We’ve already seen several companies report disappointing results due to the September hurricanes — JB Hunt (JBHT) and Delta Air Lines (DAL) to name two. Of course, even where we have seen meaningful EPS beats relative to expectations, we’ve seen concerning signs in the report internals that have weighed on share prices.
That’s the backdrop, and here’s what’s on tap this week . . .
On the Economic Front
Coming off of last week’s disappointing September Retail Sales report that saw the beginnings of post- September hurricane spending, this week we’ll be getting even more September data. With more data in hand, by the end of this week we’ll have a much more defined view on not only how the economy performed in September, but 3Q 2017 as a whole. For those that missed our Friday Weekly Wrap on the economy, you can find it here.
Turning to this week’s September economic items, investors will be assessing both the Housing Starts & Building Permits report, as well as Industrial Production & Capacity Utilization. Much like the September Retail Sales report, we expect to see some positive post-hurricane impact in the housing data, but we could see that same hurricane impact lead to a softer view on the manufacturing economy. The question to ponder will be what do the hurricane-related issues mean for excess manufacturing capacity? For that, we’ll look to the manufacturing capacity utilization figure coming in on Tuesday of this week as a guide.
Also this week, we’ll get the next iteration of the Fed’s Beige Book — something Tematica’s Chief Macro Strategist Lenore Hawkins looks forward to like a kid on Christmas Eve. Along the way, we’ll start to get the first indications of how the economy is fairing in October, thanks to the Empire Manufacturing Survey and the Philly Fed Index coming out on Thursday. Given the period they are addressing, it means we’ll soon begin piecing together the true vector and velocity of 4Q 2017 GDP vs. the expected 2.7% being reported by The Wall Street Journal’s Economic Forecasting Survey.
On the Earnings Front
This week we have 150 of the S&P 500 companies reporting, which sounds like quite a bit, but that’s just a slice of the 250 reports to be had over the next five days. As we saw last week with results from Citigroup (C), JPMorgan Chase (JPM) and Domino’s Pizza (DPZ), even better than expected results relative to consensus expectations are not lifting stocks higher. This is all yet another reason to think the current move in the market is getting a tad tired, and that’s even before we factor in the market’s increasingly stretched valuation and potential for a pushout in tax reform.
It will be a busy earnings week with a number of high profile companies, but we’re going to share the ones that we’ll be honing in on with our thematic lens:
- Connected Society and increasingly Content is King investment theme company Netflix (NFLX), which just announced a price hike, will report on Monday. Amid the subscriber growth figures, we’ll be parsing what’s happening between its domestic and foreign
- Economic Acceleration/Deceleration barometers CSX (CSX), Alcoa (AA) and United Rentals will give us a sense as to what the true pace of the economy is following the September
- We’ll learn about the health of the Rise & Fall of the Middle Class when United Continental (UAL) reports along with Fattening of the Population company Sonic (SONC). Both of these will set the tone for other airlines and quick service restaurants in the coming weeks.
- Is cord-cutting becoming a meaningful thorn in the side of Verizon (VZ)? When will Verizon look to move from 5G testing to initial commercial deployments? Those answers and others are to be had later this week. We’ll be sure to compare and contrast that with what Connected Society backbone company Ericsson (ERIC) has to say on Friday.
- Results from Synchrony Financial (SFY) and American Express (AXP) as well as several other banks will shed some light on the health of the consumer, and if more Rise & Fall of the Middle-Class folks are indeed becoming Cash-Strapped Consumers as we talked about on last week’s Cocktail Investing Podcast.
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:
Disruptive Technologies
Volvo’s switch toward electric vehicles to will start in China
We expected the playing field in electric vehicles to become more competitive as a growing number of manufacturers looked to challenge Tesla (TSLA). Given the rising middle-class and level of pollution in China — according to the Chinese Ministry of Health, industrial pollution has made cancer China’s leading cause of death — we are not surprised that Volvo would begin this transition away from combustion engines. The implications to watch will be the price points at which Volvo brings these all-electric models to market in China.
Fattening of the Population
Obesity, diabetes rises Africa thanks to fast food.
As the incomes have risen in emerging economies, quick service restaurants ranging from KFC and Pizza Hut at Yum Brands to McDonald’s, and Burger King among others have looked to capitalize on this. What this means is our Fattening of the Population theme is global in nature and is expanding past China into India and taking root in the Africa, which is now home to the fastest growing middle-class.
Aging of the Population & Connected Society
Remote Monitoring Tech to Play Large Role in Caring for Aging Baby Boomers
When we utilize our thematic approach and look at this theme that we call “The Aging of the Population” we, of course, include healthcare stocks and REIT’s with exposure to medical buildings, retirement communities and the like. The Baby Boomers, however, are the largest and wealthiest generation in the history of the world, and they are now in the process of transitioning from being income earners and supporting their families to disposing of all their wealth (and stuff!) while caring for themselves.
The impact of that shift will be felt across virtually every category, particularly even the most cutting-edge technology, as this story in Bloomberg confirms. So as we build out our Tematica Investing Select List, we turn to companies providing technology such as voice detection, autonomous vehicles, home monitoring and delivery services, and generally, things that will make maintaining independence that much easier.
Connected Society
The Connected Society & Cash-Strapped Consumer increasingly weigh on publishers
The publishing industry has been one of the early victims of the internet as readers shifted to online articles and publications, which altered the dynamics of the all-important advertising revenue stream and subscription dynamics. As we approach nearly two decades of internet related creative destruction, the rise of mobile usage is another thorn in the side of publishers and is prompting another round of cost-cutting measures to ensure what is likely a dying business model will last a bit longer.
Aside from the shift in how people consume content, there is an interesting revelation in the article below that points to people not having enough time to read a print magazine. This could be because they are chewing all sorts of digital content, including video, or it could be because Cash-Strapped Consumers are working more than ever to make ends meet.
