We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Every day, Zacks.com makes their Bull Stock of the Day available, free of charge. To see it, click here.
The Market’s Exaggerated Earnings Woes
I am reasonably confident that had we been in a ‘normal’ market environment, the modest revenue ‘misses’ from Amazon, Google’s parent Alphabet and a number of other major players would have been shrugged off. After all, it is not every day that the market gets to see companies the size of Amazon and Alphabet to be able to come out with quarterly revenue growth rates of +29.3% and +21.9%, respectively. But these are not ‘normal’ times.
We are going through a phase when the market is grappling with its collective outlook for the duration of the current economic cycle, both here in the U.S. as well as internationally. We need this context to appreciate the market’s ‘disappointment’ with Amazon even though it was able to grow its top-line by +29.3% from the same period last year to $56.6 billion.
Beyond Amazon and Alphabet, Q3 earnings results show that companies have been struggling to beat consensus revenue estimates. With Q3 results from almost 48% of the S&P 500 members already out, as of Friday, October 26th, the proportion of companies beating revenue estimates is the lowest since the fourth quarter of 2016.
The issue is bigger than companies’ inability to beat consensus revenue estimates; it is more about less than reassuring guidance and outlook for the current and coming quarters. But this weakness on the revenue and guidance fronts feeds into the narrative of skepticism about the longevity or staying power of the current economic cycle. The market is even more disappointed with Amazon and Alphabet as it sees these and other companies like them to have less of the type of cyclical exposure that ‘afflicts’ the likes of Caterpillar and 3M and other old-economy companies.
These are all legitimate concerns, but we know that markets tend to overshoot, in both directions.
The index is currently trading at 16X forward 12-month earnings estimates, down from 19.1X on November 30th, 2017. But as you can see in the chart above, the index is currently trading at levels last seen on September 30th, 2015. We know that a lot of market friendly and pro corporate earnings developments have taken place since September 30th, 2015. Admittedly, some new risks have emerged as well, including the trade uncertainty, Fed tightening and recession worries.
That said, there can be only one correct interpretation – either the market is direct cheap or earnings estimates are too high. The growth pace is projected to decelerate in a notable way in the coming quarters, with the tax-cut benefits in the base year as the primary reason for this ‘slowdown.’
But as we have seen in commentary from Caterpillar, 3M, Texas Instruments and others, the combination of rising input costs and moderating international economic growth will likely result in estimates for the coming quarters to get revised lower. We have started seeing some of that already.
But for the market valuation to make sense, estimates likely need to come down a lot more than what we have seen. I am skeptical that we will see that magnitude of negative revisions in the coming days, which makes me optimistic about the direction of stock prices than the prevailing mood would suggest.
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Amazon, Alphabet, Caterpillar, 3M and Texas Instruments are part of Zacks Earnings Preview
For Immediate Release
Chicago, IL – October 29, 2018 – Zacks.com releases the list of companies likely to issue earnings surprises. This week’s list includes Amazon (AMZN - Free Report) , Alphabet (GOOGL - Free Report) , Caterpillar (CAT - Free Report) , 3M (MMM - Free Report) and Texas Instruments (TXN - Free Report) .
To see more earnings analysis, visit https://at.zacks.com/?id=3207.
Every day, Zacks.com makes their Bull Stock of the Day available, free of charge. To see it, click here.
The Market’s Exaggerated Earnings Woes
I am reasonably confident that had we been in a ‘normal’ market environment, the modest revenue ‘misses’ from Amazon, Google’s parent Alphabet and a number of other major players would have been shrugged off. After all, it is not every day that the market gets to see companies the size of Amazon and Alphabet to be able to come out with quarterly revenue growth rates of +29.3% and +21.9%, respectively. But these are not ‘normal’ times.
We are going through a phase when the market is grappling with its collective outlook for the duration of the current economic cycle, both here in the U.S. as well as internationally. We need this context to appreciate the market’s ‘disappointment’ with Amazon even though it was able to grow its top-line by +29.3% from the same period last year to $56.6 billion.
Beyond Amazon and Alphabet, Q3 earnings results show that companies have been struggling to beat consensus revenue estimates. With Q3 results from almost 48% of the S&P 500 members already out, as of Friday, October 26th, the proportion of companies beating revenue estimates is the lowest since the fourth quarter of 2016.
The issue is bigger than companies’ inability to beat consensus revenue estimates; it is more about less than reassuring guidance and outlook for the current and coming quarters. But this weakness on the revenue and guidance fronts feeds into the narrative of skepticism about the longevity or staying power of the current economic cycle. The market is even more disappointed with Amazon and Alphabet as it sees these and other companies like them to have less of the type of cyclical exposure that ‘afflicts’ the likes of Caterpillar and 3M and other old-economy companies.
These are all legitimate concerns, but we know that markets tend to overshoot, in both directions.
The index is currently trading at 16X forward 12-month earnings estimates, down from 19.1X on November 30th, 2017. But as you can see in the chart above, the index is currently trading at levels last seen on September 30th, 2015. We know that a lot of market friendly and pro corporate earnings developments have taken place since September 30th, 2015. Admittedly, some new risks have emerged as well, including the trade uncertainty, Fed tightening and recession worries.
That said, there can be only one correct interpretation – either the market is direct cheap or earnings estimates are too high. The growth pace is projected to decelerate in a notable way in the coming quarters, with the tax-cut benefits in the base year as the primary reason for this ‘slowdown.’
But as we have seen in commentary from Caterpillar, 3M, Texas Instruments and others, the combination of rising input costs and moderating international economic growth will likely result in estimates for the coming quarters to get revised lower. We have started seeing some of that already.
But for the market valuation to make sense, estimates likely need to come down a lot more than what we have seen. I am skeptical that we will see that magnitude of negative revisions in the coming days, which makes me optimistic about the direction of stock prices than the prevailing mood would suggest.
Zacks "Profit from the Pros" e-mail newsletter offers continuous coverage of the industries and the stocks poised to outperform the market. Click to subscribe to this free newsletter today.
About Zacks
Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978. The later formation of the Zacks Rank, a proprietary stock picking system; continues to outperform the market by nearly a 3 to 1 margin. The best way to unlock the profitable stock recommendations and market insights of Zacks Investment Research is through our free daily email newsletter; Profit from the Pros. In short, it's your steady flow of Profitable ideas GUARANTEED to be worth your time! Register for your free subscription to Profit from the Pros.
Follow us on Twitter: https://twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/home.php#/pages/Zacks-Investment-Research/57553657748?ref=ts
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.