The Market’s Not So Endless Summer

The corporate earning’s season is now mostly over.

But with 10 of the sectors complete, of the 52 S&P 500 members still to report we should expect some poor results as many of them are retail. 

Amazon will likely be a factor as we can be somewhat confident that it won't be as ugly as it seems in the headlines.  

So what about the 448 members who have reported?  Earnings are up 10.9% on top of a revenue increase of 5.8%.  For the record, nearly 74% beat on EPS estimates and more than 67% beat on revenue estimates for a blowout combined beat rate.    

If we combine already reported numbers and the estimates of those still to come, the YOY increases come down slightly (assumes no more beats at all - which is unlikely) to 10.1% and 5.3% respectively. 

For the bears, growth was broad-based - and even if we go ex-energy, which clearly had a layup lapping the horrible results from last year – things are still solid all around at increases of 8.6% and 4.8%. 

As is the case each earnings season on beats, analysts for some odd reason simply ratchet down the next quarter. 

The key here is that the ratcheting down for next quarter is as light as it was for Q2, when adjustments were made after Q1. 

In other words: They’re moderate and setting the stage for more beats.

Finally, while some of this might get lost in the data, records were set in revenues, earnings and cash flows. 

What’s Even Better?

“Forward S&P earnings" from Thomson/Reuters (where the pricing mechanism is usually at work) shows most are now focused on 2018 and 2019 earnings. 

This past week the forward 4-quarter year-over-year growth rate hit 9.87%, the highest pace since 2010's 20-25%. And remember that these are after watered down adjustments.

Also, keep in mind that 2010's percentage growth rate was elevated due to the very weak numbers (and easy comps) off the 2008-2009 collapse of the global economy.

Don't ignore what the market is telling you.

The Only Issue?

US Congress is gone. Trump’s on vacation. North Korea is keeping every video producer and headline writer up at night. And the media is using it to chase attention during the haze of August.

Speaking of Haze

Let's make sure we get what's happening in the ETF world. 

I’ve mentioned this before but I feel most folks don’t yet get the implications.  

First, hats off to the marketing guys in the ETF world. Truly impressive stuff in convincing hundreds of billions of dollars that the best thing they can do is hand their assets over to a passive ETF strategy, and in doing so somehow fix things because they’re cheap.

ETFs look innocent enough, right? 

But it's kind of like saying “why not use the cheapest brain surgeon.”

How does that sound?  

Focusing innocents on the idea that passive ETF investing is "easier and cheaper" and that the real culprit is that bad old fee, well, folks are missing the point here.  

Human Behaviour

The thing that has the most impact on the results any investor sees over long periods of time is all about human behaviour – the emotions and reactions that are so programmed into our psyche.

And the ones who respond the least to them tend to win in the long run.  

When you plan for the human response and have an understanding of it the battle is won. 

So, will the next market correction bring some newly enlightened, logical responses from the passive ETF crowd?

The answer is an unequivocal: No.

Even Now…

In fact, it's happening right now as we speak. 

Companies that throttled earnings are getting sold because, um, well for no good reason really.

It goes something like this in the analysts’ world:

Company: “We beat this quarter by 7 cents but we are reducing our earnings projection next quarter by 2 cents.”

Analysts to Crowd: “We are bringing down earnings expectations and feel the company is facing pressures not seen before.”

(Meanwhile the Company is still ahead by 5 cents from previous expectations when both quarters are combined. It's maths.)

Crowd Reaction: “Easy. Sell the ETF in that sector.”

Market Reaction: “Everything in the ETF feels the same selling pressure as that one stock (that beat earnings) did.”

And if you can find the logic in all that please feel free to let me know how.

The endless summer of haze and hazy perspectives continues apace.