The below is an excerpt from tonight's edition of The Closer, sent to Bespoke Premium and Institutional clients each night along with graphs, analysis, and timing models for both single name equities and the market as a whole.
Earnings season is really in full swing now. As mentioned earlier, AAPL and MSFT both reported tonight, joining a healthy number of reports this morning. Thus far there have been a few notable trends. Firstly, financials have exceeded expectations. Bank revenue has hurdled expectations that were weighed down by Department of Justice settlements, low interest rates, and shoddy mortgage production. Our view is that this has been a) a case of extremely low expectations and b) a minor sign of improved credit conditions, allowing some loan growth. The second point is reinforced by the recent growth of commercial and industrial loans evidenced in the weekly H.8 releases from the Federal Reserve.
A second theme has been slow revenue growth for consumer-facing stocks. Mattel (MAT), YUM! Brands (YUM), Six Flags (SIX), Hasbro (HAS) and McDonalds (MCD) have all had very underwhelming reports. While the figures haven’t been anything panic-inducing, many consumer names are clearly struggling at the moment, and it’s not clear what the implications there are for the broader economy. Wage growth has absolutely been positive this year with hourly earnings for non-supervisory employees less CPI (real wage growth) in positive territory since the beginning of 2013. This has taken place at a time when employment has expanded significantly (in terms of non-farm payrolls expanding and the unemployment rate falling) so the decline in consumer appetite is curious indeed.
Finally, we are seeing extremely resilient profit margins. As of this afternoon, the EPS beat rate for the season was standing at 63% versus 57% on revenues. In other words, while revenue growth has been lackluster, companies are still making their money. How long this can continue is an important question, but we continue to be surprised at the resilience of corporate America’s profitability.