The Earnings Recession is Officially Over

Wall Street had a very good week. The markets surged to all-time highs as traders took their cue from political pronouncements from the White House.

Recall that in Thursday’s Afternoon Edition, we told you about the catalyst for the latest bull run. It came courtesy of President Trump, who said an announcement that would be “phenomenal in terms of tax” will arrive within the next three weeks.

The possibility of tax reform, particularly corporate tax reform, is something we’ve been telling readers is key to sustaining and building on the post-election gains.

Now, it looks like that may actually happen.

Of course, there’s a long way to go from “phenomenal” announcements to an actual rewrite of the U.S. tax code. Still, the episode illustrates how this market is trading off political expectations, and not off more-concrete metrics like earnings.

In some ways, that’s unfortunate, because earnings in Q4 have themselves been, well … phenomenal.

A recent Bloomberg article detailed just how strong Q4 earnings have been:

U.S. investors are being treated to one of the best sets of corporate results since the financial crisis. (But) you wouldn’t know it from the stock market.

It’s the first quarter in eight that S&P 500 Index profits will rise fast enough to pronounce an end to the earnings recession.

Not only is income up more than 4 percent, so are sales, rising at the second-fastest clip since 2012.

But why wouldn’t we know this from the stock market?

Well, per the Bloomberg piece:

Data from Bank of America Corp. show that companies whose top- and bottom-line results beat analyst predictions gained less than 1 percent the next day, less than half the average since 2000.

This tells us that, despite strong earnings, markets haven’t really cared all that much. It also tells us that traders seem to largely be ignoring traditional fundamentals like corporate bottom lines.

Instead, all eyes are on Washington, and the future of fiscal, regulatory and tax policy.

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Hey, I get it. The potential for real tax reform will trump (get used to that pun) bottom-line results … at least in the short term.

Yet when the political buzz dies down (and it always does), the market will return to the days when quarterly corporate results actually meant something.

Yes, this is a bit of an exaggeration, as traders do still react to big earnings beats and big earnings misses. Still, there’s no supplanting political expectations as the No. 1 driver of stock prices right now.

You may not like it, and you don’t have to like it. You do, however, have to respect it if you want to successfully navigate this market.

The good news here is that, despite all the noise in Washington that’s affecting markets, the basic premise to keep in mind is quite simple:

Whatever drives the Trump/Republican pro-growth, lower-tax, anti-regulation agenda forward will drive markets higher.

Conversely, whatever stalls or thwarts implementation of that agenda will drive markets lower.

Welcome to the new world order.

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If you would like to comment on this issue, or any of the issues we cover in the Afternoon Edition, all you have to do is leave me a comment on our website or send me an e-mail.

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The three indexes opened at all-time highs and put in a second day’s worth of record closing highs. The S&P 500 and Nasdaq gained 0.3% apiece, while the Dow’s nearly 100-point gain sent it 0.5% higher in Friday’s session.

• Another restructuring effort for Sears (SHLD): Shares rose 25.6% after it unveiled a plan to cut costs by $1 billion this year, and to reduce debt and pension obligations by $1.5 billion.

• Amazon’s Secret?: The e-tailer may be starting its own ladies’ lingerie line in the U.S., which could take market share from higher-end companies like Victoria’s Secret (L Brands: LB) and Calvin Klein (PVH Corp.: PVH). Amazon already offers private-label women’s undergarments at a lower cost than its competitors.

• Consumer sentiment retreats from decade peak. The University of Michigan’s metric of consumer attitudes on personal finance, interest rates, inflation, unemployment and government policies fell more than expected in February, to 95.7 vs. estimates of staying at last month’s 98.5 level.

• Dividend-hike buzz: Dunkin’ Brands (DNKN) beat earnings estimates on the top and bottom lines and said it’s raising its dividend to $0.3225 per share from 30 cents. That’s an annualized yield of nearly 2.4%. Shares rose 3.3% today.

• 90% compliant: The International Energy Agency said that OPEC is 90% compliant with its plan to cut oil production. The IEA estimates that output among member nations was 32.1 million barrels per day, below its plan to cut it to 32.5 million bpd between January and June. The Saudis and other nations reportedly cut more than expected. WTI gained 1.6% today.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

Your thoughts on “The Earnings Recession is Officially Over”

  1. Hi Brad, “Earnings Recession Officially Over????” Not so fast, it was just a few months ago, when you were saying a big decline was coming in the capital markets with black swan events over the horizon etc…True, the Trump effect has basically added some time on this rally that has been going on basically unchecked since March of 2009. But, let’s be clear, the next major capital market decline IS coming and has absolutely nothing to do with Trumps being president. It has EVERYTHING to do with WORLDWIDE DEBT, WAGE STAGNATION, DEMOGRAPHICS, CYCLES, TECHNICALS, GEOPOLITICS, European Sovereign Debt Crisis, China overbuilding etc…etc..etc… Keep an eye on DEMOGRAPHICS, CYCLES and TECHNICALS..they are the keys……THIS NEXT DECLINE WILL CATCH MANY BY SURPRISE. It may even be a set up by the banking elite against Trump, should he move on regulating the banks and uncovering corruption and auditing the FED etc…but either way, the bubble is getting bigger by the day, and we are close to uncharted territory. The markets don’t like uncertainty and Trump, while doing a great job thus far, is a perfect candidate for changing course as necessary. Make no mistake, you NEVER get a bubble building off a current bubble. The next leg down will be very close at hand!!!! Guaranteed!!! You NEVER make your money buying at the top…You always buy when there is so called “Blood in the streets”….Already making investments into SH and other inverse funds….Just like I did in February of 2000, 2001-3 for Gold, and 2006/7…

  2. Are those GAAP earnings or non-GAAP earnings? And how does the P/E ratio look using GAAP earnings?

    It still looks to me like a bubble, with lots of pointy objects in its vicinity.

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