Homepage / Investment / Can earnings afford to slow down?
Google and Facebook are watching our every move online. It's time to make them stop Daymond John tells shy airline passenger: You should have talked to me on the plane South Korea says it has no plans to shut down cryptocurrency trading AMD shares surge as Wall Street analysts say the chipmaker is ‘executing on all fronts’ James Altucher, the face of bitcoin, says he’s happy about Facebook’s cryptocurrency ad ban Pending home sales eke out 0.5 percent gain in December as supply shrinks to record low Uber is testing bike sharing in San Francisco The real source of the internet's problems might be the advertising business Game publisher EA's sales forecast tops estimates, sending shares higher GE will likely be dropped from the Dow, Deutsche Bank predicts Samsung surpasses Intel as world's biggest chipmaker for the first time Apple could be the best of the bunch in this tech earnings avalanche The 9-year stock rally still has 'years left,' says one of Wall Street's most bullish strategists Apple: We would never degrade the iPhone experience to get users to buy new phones Bitcoin headed for biggest monthly drop since January 2015 with nearly $60 billion of value wiped off ADP boosts forecast as new tax law spurs demand China 'will open even wider to the UK,' says Prime Minister Li Keqiang Big market swings are something you’re going to have to get used to, says Wells Fargo The dollar keeps weakening. Is that good news for the world? Apple downgraded by BMO, expects iPhone maker to slash revenue forecast this week SoftBank buys majority stake in Japanese messaging giant Line’s mobile division Rising interest rates cause a 2.6% pullback in weekly mortgage applications Trump's State of the Union address 'less hard' than first feared in Asia Trump vows to protect US intellectual property, without naming China Blockchain technology to boost Microsoft earnings, trader says Fujifilm to take over Xerox and combine it into the joint venture Fuji Xerox Samsung is making chips designed to mine cryptocurrencies like bitcoin There’s a risk of market turbulence, but it’s unlikely to hit until 2019, says Santander chairman We'll see up to a 15 percent correction in 2018, Swiss bank CEO says Japan's biggest messaging app Line is planning to launch a cryptocurrency exchange Quicksilver surfwear CEO missing at sea off the coast of France Venezuela says will pre-sell 'petro' cryptocurrency on Feb. 20 Nintendo ups its Switch sales expectations to 15 million units after profits rise 261% European markets seen mixed amid earnings and economic data The UK wants free trade with China. Beijing has its own goals Santander fourth-quarter net profit down 4 percent on US impairments The man who almost became ambassador to South Korea just warned about US plans for North Korea China's Leshi Internet flags $1.8 billion loss for 2017, citing conglomerate cash crunch South Korea says it uncovered about $600 million in cryptocurrency crimes Asia became less democratic in 2017 Al Gore's investment firm backs start-up created by Facebook co-founder Theresa May says she wants a free trade deal with China Chinese manufacturing weaker than expected in January Webpass is leaving Boston in latest sign of Google Fiber’s shrinking ambitions Samsung posts record fourth-quarter profit Asian shares look set for more declines as Wall Street sells off for a second day Don't count insurers out yet after Amazon-Berkshire-JP Morgan move Amazon's health care move could be a big win for consumer health start-ups Red Hat buys CoreOS, a start-up that sold tech developed by Google Here’s what Amazon told employees today about its landmark deal to deliver better health care Top official resigns after false missile alert in Hawaii Crazy odds: These online traders bet on the chaos of Washington and the Trump administration AMD falls despite beating Q4 estimates Facebook ban on bitcoin ads latest in very bad day for cryptocurrencies Indian man dies after being sucked into an MRI machine while carrying an oxygen cylinder Advice for Jeff Bezos, Warren Buffett and Jamie Dimon from a failed effort to control health costs Toys R Us poor holiday sales cast doubts on its future and could force renegotiation of loan terms The Apple sell-off is a buying opportunity into earnings, says trader Google partnership on mobile cloud services drives up MobileIron shares Facebook is banning all ads promoting cryptocurrencies — including bitcoin and ICOs Amazon's moves in health care over the last year are finally starting to make sense Buffett is getting a second chance to partner with Bezos after missing on Amazon as an investment How Pencils of Promise got a $1 million donation from an anonymous bitcoin multi-millionaire Amazon's home devices could be a key to cheaper health care, tech investor Roger McNamee says Two ex-Google engineers built an entirely different kind of self-driving car Cryptocurrencies join the global financial market sell-off as bitcoin drops 7% A travel agent is trying to charge fees for sunbeds Most of the tax cut windfall will boost buybacks and dividends, not workers' pockets, survey predicts The professor who wrote the book on making addictive technology is having second thoughts Trump's immigration policies are 'economic poison' that will cost taxpayers billions Airbnb trolls President Trump ahead of the State of the Union The iPhone X's $1,000 price tag scared everyone away Drop, a rewards app start-up, snags Airbnb's former head of engineering SEC halts one of the largest 'ICOs' ever as it wades deeper into the murky world of cryptocurrency offerings Passing on sanctions, Trump goes even softer on Russia than expected Buy insurers on dip as new initiative from Amazon, Berkshire and JP Morgan is ‘more bark than bite’: Analyst High schools stock up on Narcan to combat teen opioid crisis in US Apple will finally replace the fax machine in health care Apple is reportedly delaying new iOS features until next year because of quality problems Bond expert predicts a ‘wall of buying’ in Treasurys will protect the stock market Home prices surge to new high, up 6.2% in November Noted tech investor says the sector is not the best place to invest right now Sterling predicted to hit pre-Brexit vote level before the end of 2018 Stocks making the biggest moves premarket: AMZN, BRKB, JPM, AAPL, BX, TSLA & more Bitcoin boom to give AMD earnings a boost, says MKM Partners Apple shares fall again on another report of fading iPhone X demand Trump advisor Cohn: President to focus on $1.5 trillion infrastructure plan in State of the Union Why don't foreign investors take fright more often? The dollar is doing something it hasn’t done since 1987 UnitedHealth, CVS plunge on Bezos, Buffett and Dimon plan to improve U.S. health care Amazon, Berkshire and JPMorgan Chase to team in landmark new health care company Can earnings afford to slow down? 'Enemies of the USA': Russia slams America's list of oligarchs with ties to Putin The app that exposed the location of military bases with a heat map is reviewing its features For his next act, former Amex CEO Ken Chenault turns his focus on Silicon Valley Child experts: Just say ‘no’ to Facebook’s kids app Ryanair agrees to recognize British pilots union for first time Arab states are 'determined' to stick with reforms despite deepening 'frustration', IMF says The US 'oligarch list' is strikingly similar to Forbes’ richest Russians ranking Indian ride-hailing firm Ola expands to Australia to take on Uber

Investment

Can earnings afford to slow down?

Are we nearing the peak of earnings growth?

We are riding an historic wave of higher earnings and higher earnings revisions on the back of tax cuts and the global economic expansion.

However, just in the last couple weeks, analysts have begun to introduce 2019 earnings estimates for the companies they cover.

The good news: Most are expecting the record earnings wave will continue, with the S&P earnings up 10 percent in 2019.

The bad news: This is much lower than the earnings growth of roughly 17 percent expected in 2018.

Sure, it’s easy to say, “Hey, earnings are still likely going to rise 10 percent next year, so what’s the worry? Another year of double-digit earnings growth is still pretty good, right?”

Except it might not be good enough. Here’s the problem: Stocks are pricey. Right now, the S&P 500 is trading at roughly 18.5 times earnings estimates for 2018, well above historic averages of 15 to 16 times.

That can be justified, bulls argue, because earnings are continuing to accelerate and we are in the midst of a global economic expansion.

Fair enough. But in 2019, earnings will keep growing, but likely not at the pace we will see this year.

That’s a problem. That is earnings growth deceleration. Bears will likely start to pounce on the bulls, arguing, “You can’t say that the S&P should have this high multiple of 18.5 when earnings growth is decelerating!”

So what should be the right multiple? That’s not clear, but decelerating earnings growth would certainly imply a lower multiple.

Let’s say the multiple should be back closer to its historic levels. Let’s pick 16. With a multiple of 16, based on the just-introduced 2019 earnings estimate of $165 for the S&P 500, we come to a reasonable value for the S&P 500 of 2,640 (16 x $165 = 2,640).

Uh-oh. Remember, this is an estimate for what might be a fair value for the S&P 500 in 2019: 2,640. But the S&P closed at 2,853 on Monday, about 200 points higher than the projection.

You see why this issue of decelerating earnings is very important? Even if these are 2019 earnings estimates, the market will quickly turn its attention to those numbers, because stocks tend to react to perceptions of earnings about one year out.

To be fair, many analysts are so amazed by the upward earnings revisions for the fourth quarter — and now the first quarter — that they are just not that worried about 2019, at least not yet.

Nick Raich from the Earnings Scout is one of them: “Earnings will typically go down toward the end of earnings season as companies start to report, but not now. For the first time in seven years earnings estimates are going up.”

“If you are looking to be bearish now, it’s not on the earnings front.”

Raich is not worried about that 10 percent earnings growth for 2019 because he considers it an early estimate, a placeholder of sorts: “It’s pretty standard for analysts to predict 8 to 12 percent growth in the following year because those are typical earnings growth rate estimates,” he said. He believes that estimates will likely rise as the year progresses and thinks it is good news that the estimates are only up 10 percent.

“If analysts had come in with initial estimates of 20 or 30 percent growth in 2019, that would have been a problem, because everyone would suspect that is not sustainable,” he told me.

Others are not so sure. Christine Short, who tracks earnings for Estimize, told me, “Deceleration in growth won’t be good. Take big tech for example. We saw a rotation out of tech last quarter as valuations got too high, and even though they beat big time for the third quarter they got nothing out of it. Investors want to see continued upward growth to validate these high P/E’s.”

Just to fortify her point, she brought up three big tech names:

  1. Facebook Q3 earnings beat by 30 cents, earnings grew 46 percent year over year. Revenues grew 47 percent year over year. Stock fell 2 percent by the close the following day: “Investors finding it hard to justify 35x P/E ratio, especially in light of increased spending on security and content that will take a bite out of profits.”
  2. Intel Q4 earnings beat by 22 cents, grew 37 percent. Revenues grew 4 percent. Stock only increased 1 percent, P/E currently stands at 26 times forward earnings.
  3. Adobe Q4 earnings beat by 11 cents, grew 40 percent. Revenues grew 25 percent. Stock increased 1.4 percent in the following day, P/E currently stands at 59 times forward earnings.

Her conclusion: The big tech names in particular “will need really big beats to justify the high P/E. Any kind of deceleration would be an issue.”

Source: Investment Cnbc
Can earnings afford to slow down?

Comments are closed.