US companies reported earnings that exceeded analysts forecasts

September 4, 2023
wwblog@smartest-data.blog

TOPPED ANALYSTS FORECASTS BY 78%

Stocks closed the week mixed, but off recent lows, with the S&P 500 reaching a four-week high at 4,515 a gain of 2.50%. The major indexes turned their best performances for around 2 months. To a degree this was in response to economic data that pointed to a slowing economy. This increased speculation that the Federal Reserve would hold off on future rate hikes. Tech stocks continued to build on the progress they made the previous week.

The earnings season has essentially finished, and school is back after the summer holidays. So, what is install moving forward? All in all, the earnings reports were better than expected. OK, to date around 450 companies have reported. Then 78.7% of these companies reported earnings that exceeded analysts’ forecasts.

OK, very good, but then how does this compare to recent reporting seasons? Very favorably as this figure is higher than the average of the previous four quarters, which was 73.4%. More importantly, 78.7% is significantly higher than the long-term average of 66.4%. In fact, this Q3 2023 earnings season was the biggest rate of earnings surprise since the third quarter of 2021.

This raises the question why did the stock indexes fall in August, if as it seems it was the best Quarter in two years? To some extent this is a Buy on the rumor, Sell on the fact. It’s a trading position. Publicly traded companies report their quarterly earnings, they can provide forward earnings guidance. The guidance will indicate how they expect their business will perform in the coming quarters. Even, possibly over the next 12-months.

The S&P 500 Index (SPY) on Friday closed up +0.18%, and the Nasdaq 100 Index (QQQ) was flat.

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NVDA AND ANALYSTS FORCASTS

In the case of Nvidia earlier this year they pushed their guidance out of years. It was extremely positive, the move up in their share price was historic, more than doubling. Nvidia is now a $ 1trillion plus market cap company, take a look at the graph.

Then in this earnings season, Broadcom released solid earnings. The forward guidance given was in line with current forecasts, expectations. The stock fell. Even if a company reports earnings for the prior quarter were better than expected. The possibility of poor performance in the current quarter can cause stock prices to decline.

The group coined the “Magnificent Seven” are seven mega cap US-based companies. Apple (AAPL) , Microsoft (MSFT), Amazon (AMZN), Google (GOOG,GOOGL), Nvidia (NVDA), Tesla (TSLA), and META (Facebook). Collectively they have outperformed the S&P 500 in 2023 at least in part due to the boom in AI. Heading into September, the Magnificent Seven make up 28% of the S&P 500 Index.

They have contributed over 65% of YTD returns.

Concentration can limit stock selection

Market concentration has happened in the past, but to this extent the last time was back in the early 1920s. Concentration to this extent can limit stock selection. In short, you have to own these stocks if you are an active manager. In 2023, most didn’t.

This was due to a disbelief in the AI story, rising interest rates and the widely held view of a recession. Portfolio performance are influenced more by idiosyncratic or stock-specific risk. More than by underlying factor exposure in concentrated portfolios or markets.

the Fed could pause its rate hike campaign

Friday’s monthly U.S. payrolls report, which fanned speculation that the Fed could pause its rate hike campaign. Nonfarm payrolls increased somewhat more than predicted in August by +187,000. This exceeded expectations of +172,000. The key issue was the unemployment rate rose to an 18-month high of 3.8%. Average hourly wages in the United States fell to +4.3% year on year in August. This was down from +4.4 % year on year in July, which was in line with predictions.

Concerns linger that U.S. inflation is “too high,” and the job market remains strong. Going forward a keen eye should be focused on the long-end of the U.S. yield curve. The August ISM manufacturing index in the United States increased +1.2 to a 6-month high of 47.6. Thus exceeding estimates of 47.0. July construction spending in the United States increased by +0.7% m/m, exceeding expectations of +0.5% m/m.

The Fed’s Beige Book

The important economic events for the Labor Day week will be. Manufacturing orders, initial unemployment claims, and consumer credit. The Fed’s Beige Book for September, will add to the spotlight on the Fed. The markets are discounting a +25 basis point rate rise at the September 20 FOMC meeting at only 7%. Then a +25 basis point rate hike at the November 1 FOMC meeting, currently sits at 40%.

Global bond yields rose on Friday. The U.S. the 10-year T-note yield is higher at 4.17%. While the 10-year German bund yield is currently 2.55%. The 10-year UK gilt yield is higher at 4.43%.

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