Decent earnings support stocks
US earnings season has been surprisingly strong, given the obvious headwinds – a stronger dollar and cratering oil profits – faced by companies.
Overall earnings are distorted by enormous oil-related losses and Apple’s gigantic profits. Excluding energy and Apple, growth rates are “broadly comparable with historical levels”, according to Zacks.
Almost three-quarters of companies have beaten estimates. Estimates had already been slashed, but investors were nevertheless pleasantly surprised – companies beating estimates were rewarded more than usual, notes FactSet, while earnings misses were punished less than usual.
Caveats? Well, guidance has been worse than usual, with a slew of companies lowering their first-quarter outlook.
Secondly, it marks the 14th successive season where profit growth has exceeded revenue growth, with elevated margins continuing to prop up earnings.
Bulls may be sick of hearing profit margins appear unsustainably high, but it remains a concern.
Nevertheless, it's been a decent earnings season, steadying market nerves after a difficult beginning to 2015. Apple remains cheap Apple, which last week became the first US company to sustain a $700bn market valuation, is now worth as much as Google and Microsoft combined.
“Microsoft’s inflation-adjusted market cap in ’99 was over $800bn and look how that turned out”, cautioned the FT’s Lex column. “Beware Apple”.
It’s easy to view Apple, up more than 60 per cent over the last year, as a momentum stock fuelled by irrational exuberance. Easy, but wrong.
In 2000, Microsoft earned $7.8bn, less than half the $18bn Apple earned in the last quarter.
Microsoft traded on 73 times earnings; Apple, if one strips out its enormous cash pile, trades on 10 times 2015 estimates.
The $725bn valuation is actually quite a sober one. After all, Apple – expected to grow earnings by 30 per cent this year – trades at a notable discount to the S&P 500, which trades on 17 times estimates earnings.
Apple still faces risks, not least its overreliance on the iPhone, which accounts for more than two-thirds of profits.
However, shares have soared because earnings have soared – not because of market froth.
Boys will be boys Female investors trounced their male counterparts in 2014, according to an analysis of some 750,000 portfolios by US firm SigFig.
Despite having less money invested in equities, women earned 4.7 per cent on their investments, compared to 4.1 per cent for men.
Women with $100,000 to invest would, if that outperformance persisted, end up with $58,000 more after 30 years.
Men were 25 per cent more likely to lose money, and were much more likely to choose a brokerage ending with the word “trade”, such as ETrade or Ameritrade.
Despite their awful performance, men are 1.5 times more confident they will beat the market in 2015.
Therein lies the problem – overconfidence, which leads to overtrading.
Men churned their portfolios 50 per cent more than women in 2014, while the most frequent traders earned an average of just 0.1 per cent. Women who made their own trades also paid the price, two-thirds underperforming the S&P 500.
Clearly, investors would do well to remember the words of indexing icon John Bogle – don’t just do something, sit there.
The Good, the Bad and the Ugly Investing in the world's uglier markets "is going to wind up far more rewarding than the admittedly good-looking US".
So says GMO, the famously contrarian fund firm headed by investing icon Jeremy Grantham. In its latest client letter, GMO admits Europe looks awful while indebted Japan is in “uncharted territory”, in contrast to the high-flying US.
However, history favours cheap, unloved markets, says GMO.
Developed markets that outperformed most over a three-year period underperform by an average of 2.4 per cent annualised over the next three years, while the worst performers go on to shine.
Cheap countries about to experience unexpected GDP growth typically outperform by a huge 14.1 per cent per year for the next three years, GMO notes, while expensive countries with the worst GDP surprise lose an annualised 6.1 per cent.
More importantly, even cheap countries with the worst GDP surprise still outperform, and the expensive countries with the best GDP surprise still lose.
The US economic outlook is good, but the S&P 500 is expensive. That’s why GMO is “riding away from the Good and into the arms of the Bad and the Ugly”.
Tasteless analysts Analyst notes tend to be dry affairs; their headings, not so much. A UBS note last week was entitled "50 shades of tightening" (it dealt with interest rates, not erotica). Before that, there was Merrill Lynch's hilariously inappropriate "Je suis bullish".
Even more distasteful was an Investec note last December. Protesting about regulatory strictures on banks, it was headed “I can’t breathe” – the last words of Eric Garner, choked to death by a New York policeman.
Classy bunch, analysts.
