Earnings season is a bit like high school.
The popular kids stay popular – they hope. The unpopular kids would prefer not to be noticed. Everyone’s gleaming white teeth are exposed. Conversely, every blemish or pimple may be brought to light, too.
So it is with the stock market, where momentum tend to favor the popular stocks and the companies that have bested earnings or are viewed as being on the next big thing’s cutting edge. Valuations be darned, in this case. The overlooked names may be a rally but are likely to be stuck in a perpetual state of “show me” for investors.
At the beginning of February, the U.S. is roughly at the halfway mark for earnings, and from a big-picture perspective, things are chugging along decently well. Thomson Reuters has pegged earnings growth at roughly 7 percent for the quarter that just ended in December, with revenue growth at 4 percent. The fact that the bottom line has outpaced top-line growth is heartening as it shows cost control (more often than not, though other machinations such as stock buybacks can goose earnings without moving the revenue needle much).
Earnings across the financial and tech sectors are expected by consensus to grow by double-digit percentages. At least some of that will come from tax cuts, should they come to pass this year, and the rest must, by extension, come from organic growth in sales or leverage at the operating level. The latter may be tough. Inputs will be on the rise as inflation accelerates. And these inputs run the gamut from oil and energy, which will rise on weaker dollar policies, to wages, which will rise with inflation. By default, then, revenues must spur growth at the operating earnings level. For financial firms, the impact of rising rates will take some time to hit the income statement, with positive results on the net income margin. For tech firms, the revenue line will be duly impacted by international ebb and flow of demand for software and services.
For the consumer, closer to home, two changes are afoot. The movement to increase rates via the Fed means that everything will get a bit more expensive, including debt that is carried on credit cards and via mortgages. U.S. markets have not yet seen that impact show up in any real slowdown or anticipatory pullback in spending.
This week marks the earnings reports of firms as diverse as Ralph Lauren and Deckers. The economy has some legs, at least in terms of low unemployment and the fact that there will be fiscal stimulus ahead, creating jobs, at least as has been promised by the new powers that be in Washington. Sanguine impressions about the economy will lead to more spending.
In the meantime, the Amazon effect is having an outsized impact on retailers that will resound far beyond a quarterly earnings report, as we will no doubt hear, and upon a global stage. Even if consumers do spend more, it matters where they are spending, and lest you’ve been hiding under a rock, it’s not been at the mall. Stay tuned for luxury and apparel goods makers to weigh in on life beyond the holiday shopping season.