Blaine Rollins: "More earnings? No problem."

Blaine Rollins: "More earnings? No problem."




by Blaine Rollins,CFA, 361 Capital

Corporate America continues to exceed expectations as the bulk of the earnings season winds down. Both sales and earnings beats are above their historical averages as the global economy continues to pick up helping top-line beats, while also creating incremental margins to assist the in bottom-line beats. Before the earnings season started, Q3 expectations were reduced rather significantly on worries over U.S. growth and falling energy prices. But since then, the realized U.S. data points in October have rebounded and the hurricane storm impact was evident but absorbed. Looking forward, the Technology and Materials sectors look well positioned to benefit from GDP growth, while the Energy sector could be the giant upside surprise for Q4 should commodity prices continue to bounce. (And don’t forget to factor in this weekend’s episode of the Saudi Game of Thrones which could push energy even further.)

While equity investors focused on corporate earnings, many others fretted over the House’s tax reform package. I still see major tax reform as highly unlikely so didn’t spend too many hours reading up on the details. There is no bigger fan of tax simplification than I, but if Congress is going to tackle one of the biggest items in politics, it will need a very organized, well thought out plan with significant leadership backing. What I saw looked more like a 2nd grader’s science fair project that was assembled by sleep deprived-parents at 2 am. And cutting taxes on pass-through entities and eliminating AMT? I can only guess whose idea that was. But even with dynamic scoring, the current House plan will add $1 trillion to our U.S. debt levels. So, I can’t believe that this is anything that fiscal conservative members of Congress will vote for.

The good news is that the markets absolutely do not care. The jobs report was good. Three percent GDP looks to be on track. Short-term interest rates are agreeing and moving higher. There is a new head at the Fed and the Bond market is calm about the change. And corporate merger and acquisition departments are busy looking past Washington and moving forward with strategic deals. (Broadcom/Qualcomm, Marvell/Cavium, CVS/Aetna and now Disney/21st Century Fox.) So, ignore the clouds and fog and keep your eye on that landing ramp and all will be fine.

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October ended strong and November has grabbed the baton…

@JBoorman: $SPX starts November the same as the previous six months, with a higher high and higher low.

SPX Trade Index Chart

When ‘Sell in May and Go Away’ doesn’t work, get long…

Throughout the year, we have been highlighting a now considerable list of positive studies suggesting that US equities will likely finish the year higher. The longer-term outlook for US equities remains positive. SPX rose more than 8% during May-October. This period is often considered the “weakest 6 months of the year”; when SPX has done well during this period, the next 6 months have also been strong, with SPX gaining a median of 12% and closing the period with a gain 91% of the time (next two charts from Stock Almanac).

(The Fat Pitch)

Market Performance Chart

And year-end seasonality is not just a U.S. thing…

Six Months When Stock Soar Chart

(Daily Mail)

Focusing on earnings, look at the recovery in Q3 earnings as companies have crushed their quarters the last three weeks…

Q3 Earnings Chart

(JP Morgan)

Very interesting to see the surprises in the Energy sector…

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