Charlie Brown Kicks the Football

by Shawn Narancich, CFA
Executive Vice President of Research

Peak Earnings

Amid the busiest week of second quarter earnings reports, blue-chip stocks continued to trade near record levels. With nearly 40 percent of the S&P 500 companies having reported over the past five days, the clear plurality of results has exceeded expectations. In comparison to the 7 percent growth analysts were forecasting before earnings season began, the consensus of blue-chip earnings growth for Q2 now stands at 9 percent, and is on track to reach double digits by the time the remaining 40 percent of companies finish reporting in August. 

After several years of flat earnings owing to low interest rates, declining oil prices, and a strong dollar, in January we stated that corporate America needed to deliver earnings growth this year for stocks to make further gains. To borrow the cartoon metaphor we used in our 2017 Investment Outlook, investor Charlie Brown is once again attempting to kick the earnings football and for once, Lucy (corporate America) isn’t yanking it away in 2017.

Not so Prime

Amazon CEO Jeff Bezos briefly became the world’s richest man this week as the company in which he owns a 17 percent stake briefly eclipsed a market capitalization of $500 billion. That was before his company reported quarterly numbers, which we would observe was one “earnings football” that Charlie Brown did not get to kick. While sales were in bounds, Amazon reported its least profitable quarter in two years, and the bottom line result missed the goal post by a country mile. As a result, 11 billion dollars was shaved off Amazon’s market capitalization today, to the effect that Microsoft founder Bill Gates will remain the world’s richest man, at least for now.

For Starbucks shareholders this week, the damage was even worse as the stock tanked by 10 percent on Friday. While the coffee king reported in-line earnings, sales missed estimates and the company announced that it will be closing all 379 of its Teavana gourmet tea stores due to inadequate sales. Slower traffic in the company’s ubiquitous coffee stores dampened same-store sales growth, and with tight labor markets adversely impacting overhead costs at the margin, the Starbucks earnings outlook has dimmed. 

Connected Calls

On the other hand, key telecom service providers AT&T and Verizon (colloquially known as “the Bells”) reported better than expected subscriber numbers and allayed fears of a heightened competitive environment unduly weighing on the companies’ profitability. At least for now, the Bells are holding their own against increasingly relevant competitors Sprint and T-Mobile. Reported profits were in-line or better than forecasts, and the stocks staged a relief rally in response. For our part, we remain bearish on the telecom investment outlook, fearing that stagnant-to-declining wireless prices amid heightened levels of data consumption will impair the companies’ longer-term profitability.

Finally, we would observe the dichotomy of results reported by Big Oil today. Chevron cleared the earnings bar as oil and gas production beat consensus estimates amid the company’s declining capital intensity. In contrast, Exxon Mobil missed production estimates and came up short on the bottom line. The result? Not surprisingly, Chevron’s stock outperformed, up 2 percent versus Exxon’s 2 percent decline. More broadly within the energy sector, we are encouraged by the oil inventory reductions and moderating rig counts being reported domestically, and remain constructive on the price of oil.

Takeaways for the Week:

  • The heaviest week of second quarter reporting season came off as a net success
  • Amid rising earnings estimates, stocks remain well bid