Over the last several weeks, a majority of U.S. companies have divulged their earnings. The vast majority have been their downwardly revised estimates for the first quarter with bottom line earnings per share growing at more than 18% on an annualized basis.
Yet, the market has failed to respond. Even stocks that have crushed earnings by a wide margin have failed to hold onto their gains in many cases like Boeing (BA).
While there are certainly bright spots to be had, the overall trend and direction of the market remains lacking. As Doug Kass noted yesterday:
“My expectation is of a clearly defined trading range (over the near term) of the S&P Index of between 2550 and 2725. While I believe that it’s increasingly likely that we will breach the lower side of the range in the second half of this year – for now I see a continued trading range (of about 175 S&P points).”
Just a reminder…the “second half of the year” begins next month.
Stepping back we can see this direction-less trading range more clearly.
Yesterday’s “dump and pump” was led by “pretty positive comments” coming out of China relative to trade talks. The good news is the late day surge kept the markets above critical 200-day moving average support keeping bulls alive for now.
While buyers, or should I say “robots,” have repeatedly showed up to “buy the 200-dma dip,” the question is will they be able to maintain it?
The hope is that since earnings have been beating expectations the market will begin to gain some traction. However, speaking of earnings, they may not be as “organic” as they seem.
According to S&P more than $1 Trillion has gone to dividends and buybacks (exactly where we said it would go) and with Apple‘s announcement of another $100 Billion the total numbers will continue to rise.
“Given the environment … and the ‘desire’ of companies to show shareholder return, the return to a double-digit actual cash payment gain (year-over-year) seems feasible, along with the first trillion-dollar year of dividends and buybacks for the S&P 500.
So far, 169 S&P 500 members have hiked their dividends in the first four months of the year, while no company in the index cut their dividend. Those buyback have produced an outrageous 72% gain.” – Howard Silverblatt.
But therein lies the problem, and something I noted earlier this week:
“Our experience tells us that these leaderless periods typically occur during important transitions in the market. So what is that transition today and how can we harness it to make money? Sticking with our original thesis for 2018, we think the market is digesting the fact that the tax cut last year has created a lower quality increase in US earnings growth that almost guarantees a peak rate of change by 3Q. Furthermore, the second order effects of said tax cuts are not all positive.”
With estimates through the end of 2019 still at astronomically high levels, the “Herculean task” of actually achieving those lofty levels will be quite challenging. In just the past month (between April 1st and April 30th) the estimated earnings per share for 2019 has risen by more than $8 per share.
Of course, estimates will be revised lower, which will raise forward valuations, and investors will have to start adjusting overly optimistic expectations for reality. Furthermore, as we head into 2019, the year-over-year growth rates comparisons are going to fall markedly.
In other words, with companies rushing to issue dividends and buy back shares the current environment is just about as “good as it can get.” As Sam Zell just recently noted:
“The stock market, despite all of the gyrations, is still at an all-time high. Real estate is priced to perfection.”
Which is problematic for things getting “gooder.”
Which leaves a whole lot of room for disappointment.
Are you not entertained?
Just something to think about as you catch up on your weekend reading list.
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