By Matt Schreiber – WBI President and Chief Investment Strategist
It’s getting gnarly out there. The bear has been reaching out of its cave and slashing stock prices, but will it come out of hibernation? Recent reports show earnings are up but overall revenues are getting soft, which could be an indicator of future earnings trouble.
Q3 2018 S&P 500 Earnings Recap
According to Bloomberg as of 10/26, 242 companies have reported earnings in the S&P 500 so far, with earnings growth of 23% and revenue growth of 8%, which is a bit disappointing. Forward guidance on the revenue side is starting to look creepy. We’ve said this for years and it’s appropriate to repeat now — if you want to know what the earnings did look at the earnings reports, that’s what happened last quarter, but it’s revenue that can tell you where earnings may be next quarter. Some notable sectors include:
Consumer Discretionary – 32% earnings growth, 13% revenue growth
This sector has been a major contributor to the stock market’s positive return this year. The consumer’s been really strong, consumers have been spending money, but sentiment is starting to weaken. The consumer is challenged by higher interest rates, the fact that the markets are going down, and a shift in the tone of the expectations in the market. We’re worried about what the consumer thinks about the slowing revenue trend, higher interest rates, terrible tariffs — all the things that are weighing on the market.
Healthcare – 11% earnings growth, 9% revenue growth
Healthcare has been a great performing sector this year, the number two sector from a price perspective. It should continue to roll, people are getting older and the sector is getting a little wind in its back because the FDA has softened their stance a bit.
Info Tech – 27% earnings growth, 10% revenue growth
Revenue growth jumped a little higher since last week which is a good sign, but recently this sector has been what’s causing investors indigestion. Future guidance on revenue has been negative, so we’ll see if that changes should the revenue trend increase as more companies report.
Financials – 27% earnings growth, 4% revenue growth
Although earnings are strong, watch out for that revenue number. Not a good indicator of future earnings potential here.
Consumer Staples – 8% earnings growth, 5% revenue growth
Most of the Staples sector is housing related, which has already started to weaken. This is a sector that is leading the charge lower. It could be a leading indicator of the strength of fundamentals over the next couple of quarters as housing prices adjust, new housing starts actually begin to make an impact, and interest rates start to bite.
For more on this topic, listen to Bull | Bear Radio #49: S&P, We Have a Problem
Past performance does not guarantee future results. The views presented are those of Matt Schreiber and Don Schreiber, Jr. and should not be construed as investment advice. Matt Schreiber, Don Schreiber, or clients of WBI may own stock/sectors discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security.No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation,please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services,and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
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Unless otherwise noted, data provided is from Bloomberg as of 10/26/18.