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Amazon, Alphabet, Caterpillar, 3M and Texas Instruments are part of Zacks Earnings Preview

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For Immediate Release

Chicago, IL – October 29, 2018 – 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) .

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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.

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