Earnings are strong but could downward revisions be a reason for worry? Read on to get the details…
Earnings are Strong, But There May be a Cause for Concern – we now have Q2 results from 381 S&P 500 companies, and the numbers are robust. Total earnings are up +25% from the same period last year on +10.4% higher revenues, with a sturdy 80.1% of those companies exceeding the street’s expectations. In our view, stocks respond positively to earnings that exceed expectations, and we’ve seen that so far in Q2. What’s more, 73.8% of those companies also surpassed revenue estimates, which indicates that earnings strength may be tied to more than just the tax cuts. The one area of concern we would highlight is the earnings revisions trend for the current period (Q3 2018), which is at odds with what we had been seeing in the comparable periods in the preceding three reporting cycles. You can see the trend in the chart below, which shows how Q3 2018 estimates for the S&P 500 index have come down over the last four weeks.1
To be sure, the downward revisions are not a cause for alarm or worry necessarily, but it is nevertheless a negative development in an otherwise very strong Q2 reporting cycle. It may be premature to say that negative revisions are overshadowing all the other positives, but it nevertheless warrants close monitoring.
Is the Trump Administration Posturing to Weaken the Dollar? There is a growing buzz amongst some market watchers and economists that the Trump administration may be considering intervening in the markets to weaken the dollar. President’s Trumps frequent comments about China manipulating its currency and his recent remarks about his disdain for rising interest rates have only added fuel to the speculation about dollar intervention. The United States has not intervened in markets to buy or sell the dollar since 2011, when it participated in an international bid to stop the yen from surging after a major earthquake and tsunami in Japan. The United States has long supported and even led a Group of 20 pact that member economies will “refrain from competitive devaluations, and will not target our exchange rates for competitive purposes.” However, as we’ve learned with this administration, historical precedents are by no means set in stone. One factor that may nudge the administration into action? China’s trade surplus with the United States only dipped slightly last month even with the enacted tariffs, from a record $28.97B in June to $28.09B last month.3
Will Tesla Go Private? Tesla Chief Executive Elon Musk sent a shockwave through the investment world this week when he signaled the possibility of buying back Tesla to take it private. In a casual tweet, Musk indicated that he had the financing available to take the public company at $420 a share, which would value it at $72 billion and also make it the largest leveraged buyout in history. Though this story is interesting in many ways, it perhaps should not be so surprising. Musk and Tesla exist at the epicenter of Silicon Valley, which is the home to behemoth private equity and venture capital firms, and also the home of several billionaires including Musk himself. Also, this week, Tesla announced it would begin hiring for its $2 billion Shanghai factory, which when completed will double the size of the company’s global manufacturing footprint.4
Looking for a New Career? Consider Being an Airline Pilot – Boeing noted this week that based on its orders, airlines are going to need an estimated 635,000 pilots over the next two decades. In order to shore up demand for pilots, airlines have been sweetening the deal by boosting salaries and setting up training centers. If the trend line continues on its current path, there could be a global shortage of airline pilots in the not-too-distant future.5
There is no way to predict how these news stories will pan out or exactly where the market will go. But at the end of the day, you should not get too caught up in the day to day fluctuations. Instead, in my view, allocating a portfolio should be more about what you’re trying to accomplish in the next ten years, not the next ten months. With that, my advice is to take the longer view, set your course, and stick to it.
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Disclosure
2 Bloomberg, August 8, 2018, https://www.bloomberg.com/news/articles/2018-08-08/jpmorgan-says-trump-may-sell-dollars-as-weapon-in-u-s-trade-war
3 CNN Money, August 7, 2018, https://money.cnn.com/2018/08/07/news/companies/elon-musk-tesla-private/index.html
4 Reuters, June 6, 2018, https://www.reuters.com/article/us-airlines-iata-pilots-analysis/airlines-struggle-with-global-pilot-shortage-idUSKCN1J20XK
5 ZIM may amend or rescind the "Dean's List of Investment Strategies” guide for any reason and at ZIM’s discretion.
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