For the past few weeks, I've been having a debate about whether we are near a peak in growth that would continue to weaken the stock market.
This is an especially important conversation for two reasons:
1) the economic and earnings growth have been very good in the past year, making an astute investor wonder if this is "as good as it gets."
2) we are headed into a period of rising interest rates as inflation finally shows signs of life. Here are some of those articles and videos for your review...
Growth Peak on the Horizon
Has the Stock Market Topped Already?
The Not-Good-Enough-Yet Earnings Season
Today, after we entered the heart of earnings season with nearly 1/3 of S&P members having reported this week, I want to update some of the corporate profit projections I've been showing you.
I will present 4 graphs from the weekly update of our Director of Research, Sheraz Mian.
The first graph is quarterly earnings growth (year-over-year, which compares a given quarter to the same quarter in the previous year) for the S&P 500 since Q4 2016. What you see are the actual growth rates through Q4 2017, the current picture in Q1, and the estimates for the rest of 2018...
A few things stand out here. First, the current Q1 picture has risen dramatically in the past 2 weeks since I compiled the data for my article Has the Stock Market Topped Already? from 16% to 20% growth.
This is simply based on the number and magnitude of earnings "beats," or upside surprises.
Second, the remainder of the year's estimates in Q2 through Q4 haven't changed much and still show a very positive picture of strong year-over-year growth. The difference, again, is that Q1 could end up being a peak in the growth rate vs an expected peak in Q3.
Third, Technology and Finance are big contributors to this profit outlook (as we will discuss), and even a recovering Energy sector is helping.
The rate of change of growth is certainly paramount because it speaks to how fast conditions are improving, or deteriorating. But another way to view record corporate profits in a steady-as-she-goes 2-3% GDP economy is through the total cash piling up...
Overall, this data and these estimates remain a big reason to be bullish on the stock market as equity fund managers will continue to be net buyers in this growth environment.
The third graph is of profit growth estimates for the Technology sector...
This is the one that has concerned me most because Technology is such an important driver and leader of growth in the economy and in the stock market.
But the reason those bars in 2018 are getting smaller is because the comparable year-over-year hurdles, or "comps," are so hard to top.
And when you look at the actual dollars piling up, the profit picture is robust and attractive for this key sector...
This year's total Tech profit haul is expected to hit $314 billion. And next year is projected to climb 9.5% to over $344 billion.
I mentioned that Finance was just as strong as Tech. This year's profit pile from banks and their ilk gets to $302 billion and next year ratchets up 9.3% to $330 billion.
To see the full 28-page PDF report with all these charts, plus the data tables behind them, check out Sheraz Mian's latest Earnings Trends report here...
Q1 Earnings Growth Strongest in 7 Years
Of course, the big caveat with all of the projections in these graphs is this: if the economy stumbles, whether because of a trade war or an inverted yield curve, then all bets are off.
I don't think either of those events derail this expansion just yet and so I continue to buy Technology growth stocks like NVIDIA (NVDA - Free Report) , Facebook (FB - Free Report) , Lam Research (LRCX - Free Report) , and Alibaba (BABA - Free Report) .
While you can read plenty in my prior reports about Wall Street investment bank analysts climbing over each other to be the first to call the "semiconductor cycle top" every quarter, after Lam's last earnings report the average analyst price target moved above $250.
Despite the "eyes on the exits" pessimism of many analysts, the Technology Super Cycle doesn't appear to be ending any time soon.
(The link above is to my special report for Zacks Confidential from December. Just scroll down to the 3rd report from 12/11/17)
I'm even getting ready to buy Apple (AAPL - Free Report) again next week (I took profits recently) before or after their earnings report on May 1. Lots of iPhone sales disappointment is already priced-in and the stock is very attractive near $160.
We just need to see estimates moving back up and that may take an outstanding report and new product innovations to get analysts optimistic again.
Until then, keep making your lists of Zacks #1 Rank stocks to buy on the dips!
Disclosure: I own shares of NVDA, FB, LRCX, and BABA for the Zacks TAZR Trader portfolio.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service. Click Follow Author above to receive his latest stock research and macro analysis.