Top 3 Takeaways from this Earnings Season
By Don Schreiber, Jr. - WBI Founder and CEO
(Printable PDF available below)
Q2 earnings season has gotten us excited! There had been talk that Q1 was going to be hard to beat, but Q2 has come in even stronger. Corporate results are phenomenal, and despite some risks to the market (i.e. tariffs and the Fed), the economy still posted a 4.1% GDP growth.1 Here are our three takeaways from Q2’s earnings results:
#1 - The Terrible Tariffs Aren’t Slowing Down the Big Companies
According to FactSet as of August 10, almost 80% of the S&P 500 companies that have reported earnings have beat analyst estimates. That’s huge, and if it ends up being the final number will be the highest level in the history of FactSet tracking positive EPS (earnings-per-share) surprise. Earnings growth for the S&P came in at 25%, which is a 20% increase from the analysts’ estimate on June 30 and is the second highest earnings growth since 2010. It’s important to look at the revenue leaders too, as revenue can be an indicator of the next quarter’s earnings. The revenue growth for the S&P was a strong 10%. Four sectors leading the pack with double-digit revenue growth were materials (27%), energy (23%), information technology (15%), and real estate (14%).
The Dow is also having a banner earnings season with 28% earnings growth and 14% revenue growth.2 These were companies that were supposed to get crushed by the tariffs, and they’re bringing in revenue growth 40% better than the S&P 500.
One reason that companies are staying strong in the midst of tariffs is the consumer. According to the University of Michigan, “Despite the expectation of higher inflation and higher interest rates during the year ahead, consumers have kept their confidence at high levels due to favorable job and income prospects.”3 So consumers are still buying, even with companies raising prices to offset tariff increases.
#2 - More Jobs and Increased Wages
The increase in consumer spending, driven by rising incomes and strong confidence, has led to an increase in jobs. The economy through the first seven months this year has averaged 215,000 new jobs, which is a significant increase from the 184,000 jobs added on average during the first seven months of 2017. In January, employment growth economists surveyed by The Wall Street Journal predicted only 165,000 average monthly jobs in 2018, so we’re looking at a 30% increase above projections.
Where are most of the jobs being added? Retailers. Brick and mortar retailers, at that - not Amazon. Economists expected hiring to slow in 2018 after the unemployment rate came in at 3.9% indicating a tight labor market, but we’re seeing just the opposite - as retailers added an average of 12,000 jobs each month this year, versus the 6,000 a month negative jobs through the first 7 months of last year. The manufacturing sector has been a consistent grower of jobs and is also adding jobs like crazy. So we have more jobs which means more people working, and increasing wages, which is a good sign.4
#3 - Value’s Giving Growth a Run for its Money
Value has started to gain momentum over growth, as shown with July’s performance of the Russell 1000 Value index versus the Russell 1000 Growth index. As of July 2018, the Russell 1000 Value outperformed Russell 1000 Growth by the widest margin since Sept 2017, 3.8% vs. 2.9% annualized return.5
So, why value stocks? Value stocks have strong fundamentals - earnings and dividends among others - that trade below their intrinsic value and are often undervalued by the market. They have the potential to produce higher returns with less volatility compared with growth and blend stocks. Additionally, dividend payments from value stocks can provide a buffer if the market is volatile. Long-term, value stocks have outperformed their growth counterparts. Let’s take a closer look using a 20-year history.5
From July 31, 1998 to July 31, 2018, cumulative total return for the Russell 1000 Value was 286% versus 248% for Russell 1000 Growth. This time period includes the height of growth stocks in 1998 and 1999, and value still beat growth. The chart also shows the power of dividends, looking at total return vs. price return.
If you take out the tech boom of the late 90’s from this study, cumulative return for Value was 255% versus 129% for growth from July 2000 to 2018.
Chart data provided by: Morningstar, as of 7/31/2018. Past performance does not guarantee future results. Indices are unmanaged and cannot be invested in directly.
Overall, it’s one of the best earnings quarters we’ve seen in a while. Earnings are strengthening and forecasts are getting better. Looking at company fundamentals is a key ingredient to being a savvy investor. We don’t believe in just buying an index, you have to educate yourself on the individual stocks. There are some good ones, there are some not so good ones. The point is, you have choices. The recent FAANG trade has us in a worrisome episode of deja-vu back to 1999, before the NASDAQ cratered almost 80%.6 It might be time to take a closer look at your portfolio and see if value and risk mitigation can help protect your capital from the next bear market.
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Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr., and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
Price Return: rate of return on an investment portfolio, where the return measure takes into account only the capital appreciation of the portfolio, while the income generated by the assets in the portfolio, in the form of interest and dividends, is ignored. Total Return: rate of return on an investment portfolio, where the return measure takes into account the capital appreciation of the portfolio and the income generated by the assets in the portfolio, in the form of interest and dividends. Russell 1000 Growth Index: comprised of Russell 1000 companies with higher predicted and historical growth rates. Russell 1000 Value Index: comprised of Russell 1000 companies with lower predicted and historical growth rates.
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1 “Gross Domestic Product.” U.S. Bureau of Economic Analysis (BEA). Accessed 16 Aug. 2018.
2 Bloomberg, 8 Aug. 2018.
3 Surveys of Consumers, www.sca.isr.umich.edu/. Accessed 16 Aug. 2018.
4 Morath, Eric. “Stores, Factories Lead This Year's Unexpected Hiring Boom.” Morningstar.com, 5 Aug. 2018
5 Killa, Sweta. “Value Stocks Outperforming Growth: 5 Top Picks.” NASDAQ.com, 7 Aug. 2018
6 Glassman, James K. “3 Lessons for Investors From the Tech Bubble.” NASDAQ.com, 11 Feb. 2015