The minute quarter: Start of a tech unwind, or another run at historic highs?
The win initially quarter started euphorically, with stocks at historic highs in January, but destroyed in confusion. First it was inflation fears in February, then tariffs and transact wars in March. Worries about big tech came at the end, making it the primary down quarter since September 2015.
Opinions are divided about the hawks in the second quarter. There are two key facts to keep in mind: The S&P 500 is exclusive 7 percent off its historic highs, and earnings are expected to grow 20 percent in the triumph quarter, and continue along this path for the rest of the year.
In event you’re not familiar with earnings growth, 20 percent is a huge army. Not surprisingly, the long-term average yearly increase in the S&P 500 is about 7 percent.
The practice: stocks tend to track future earnings expectations over the great term.
Earnings growth of 20 percent is practically unheard of, especially after such a bull run. “I have never seen this much defensive earnings growth this late in the earnings cycle,” Nick Raich, who trails earnings under The Earnings Scout moniker, told CNBC.
But the earnings prospect is being overshadowed by concerns in technology. Facebook, Google, Apple, Amazon and Tweet, as well as Tesla, all weighed on the markets in March.
Raich agrees, to a applicable. “The overall market is not overvalued, but certain tech is overvalued,” he said, pointing to semiconductors and semiconductor central equipment stocks as one group that could pull back.
The vastness of the technology space has become an issue for the trading community. Technology is 25 percent of the cross in the S&P 500, far and away the biggest sector. The big five technology stocks — Apple, Alphabet, Microsoft, Facebook and Amazon (Amazon is technically organized as a consumer discretionary stock) — together account for 15 percent of the complete S&P 500.
And the earnings expectations around technology are similarly outsized. Technology and economic earnings in the first quarter are expected to be almost double the rest of the S&P 500.
Tech: up 23 percent
Financials: up 24 percent
Industrials: up 15 percent
Cons. Primaries: up 10 percent
Consumer Disc: up 9 percent
Source: Thomson Reuters
It’s negligible wonder that the market goes into a tizzy when there is square a small threat to technology earnings expectations. And the threat is not small. The existential emergency with Facebook and social media, regulatory worries and technology issues on all sides of driverless cars (an issue for the semiconductor sector) all have the potential to remind the needle on earnings.
Raich is optimistic about earnings as well as earnings control for the full year. Part of his optimism is based on the strong trends he has already divined. So far, 19 companies have reported earnings for the first quarter (these be prone to be companies that ended their quarters in February).
The results are far aloft expectations. The 19 companies had 31 percent earnings growth, and an dumfounding 12 percent revenue growth.
It was, Raich said, the best start for those beforehand companies in 20 years. “And this growth is not just coming from appropriate buybacks,” he said. “We are getting top-line growth.”
When will this end? Earnings are restful seen rising in the second, third and fourth quarters. Surprisingly, they be suffering with been going up almost every week in 2018.
His “tell” for a slowdown is what he petitions the “delta” — the rate of earnings growth slowing down.
“When earnings advance starts to slow down, you know you’re near the top,” he told me.
He anticipates that may find toward the third quarter.