"If you aren't in over your head, how do you know how tall you are?" -- T.S. Eliot
Avenue of Attack
That was some late Friday charge made by the broader indices, wasn't it? That run, made over the last 15 to 20 minutes of the day, without any kind of regard for technical resistance, perhaps indicated a final pricing in for equities of the results of this weekend's results seen in France. Futures markets seem bored by that result. Now, that that election has finally been put to bed, now that April "Jobs Day" is out of the way, now that a week heavy in earnings, and colored in by a steep sell-off across commodities markets has passed, where do we head from here?
Domestically, there are still quite a few balls in the air. First off, to our immediate front, there is still an earnings season to finish off. Then, there is the unfinished business of policy. The House passed that health reform bill last week that may or may not go anywhere in the Senate, but is almost certain to change dramatically as it continues to evolve. Then, there's tax reform. That hope remains, as much as earnings, to be among the biggest stories for the markets, and potentially the foundation of national confidence going forward. The ability of tax reform to punch its weight in small communities and grow the economy will be reliant upon the successful completion of health care reform. One avenue of attack becomes far less potent without proper use of the other. However, as long as these items do drag out, faith will persist. As long as faith persists, the market will remain difficult to short in the medium to long-term.
The pace of earnings season finally slows somewhat this week. A "mere" 41 companies that reside within the S&P 500 will report quarterly numbers by Friday. By Thursday, we will at last get to the retail sector, a group that traditionally brings up the rear of the season as far as timing goes. Like I've said, policy remains important, but earnings are where it's at, and they are easily quantifiable. Nothing is as important to a rising equity market as actually making money, or in many cases, the positive forward guidance that has come with the numbers. As we creep into the work week, 80% of the S&P 500 have already put their numbers to the tape for the first quarter.
Many investors cite valuations that seem stretched. I have often used the example of one growing into a "hand me down" T-shirt as representative of what was going on in the equity space. Earnings are on track to have gained 13.5% year over year at this point. If this performance hangs on throughout the remainder of the season, this will be strongest quarter in terms of yearly measurement for U.S. companies since 2011. You might recall that going into the season, analysts had cut consensus view for earnings growth over first quarter to a little above 9%, down from more than 10%.
There is quite a story being told by the data. Almost 74% of companies have beaten EPS (earnings per share) expectations. Those are easily managed by many companies, you say? OK, revenues are up 7.6% year over year for the quarter vs. expectations coming in of 6.9%. My notebooks are simply littered with results showing double-digit growth for revenue. It makes me look twice. That's something I really haven't seen ... well, since before I was the only one left doing this work with a pencil and a marble notebook. The beat rate for revenue growth is perhaps the most impressive slice of this data, running at a cool 67%. That is vs. a five-year average of 53%. Significant, when going over years worth of notebooks sporting minus signs.