Dumping U.S. stocks over earnings disappointment is a mistake, says Deutsche Bank
While Wall Street is hoping for a bright start to November, there is a lot of wariness out there.
Paranoia runs deep, and into your trading strategies it will creep, especially after the worst month for the S&P 500 since 2009, and that horrible mauling for the tech set. So there is plenty of chatter about an “uninspiring” rally and chart godfathers telling us to look out below.
One (of many) reasons stocks got hammered last month is because investors just didn’t like what they saw on earnings or outlooks, even if they weren’t half bad in some cases. It is no wonder that the pressure is on for Apple later to deliver the market equivalent of a perfect score on quarterly results, and hope the market doesn’t identify notable weak spots.
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Our call of the day from Binky Chadha, chief U.S. equity & global strategist at Deutsche Bank, addresses that mood, saying investors should chill because we are just returning to earnings normality here.
Chadha attempts to address earnings anxieties that have plagued the market. He says fretting over beats and guidance are overdone. The analysts says the fact is that results are returning to historical norms; and as a result, may be lower than in recent quarters, but are still higher than the historical average.
“We see this reversion to normal as typical following unexpected accelerations in growth (such as those coming out of recessions and shocks including the effects of the recent cut in the corporate tax rate),” says the strategist.
And while negative guidance has been outnumbering positive ones in the recent quarter, that also reflects that mean reversion (as statistical wonks sometimes refer to it). Sure, some 27% of companies have lowered their guidance, compared with 21% offering earnings outlook improvements, and that doesn’t look great. However, on a historical basis, those percentages are an average 33% and 20%, respectively, he writes.
On the upside: S&P 500 earnings growth is on track to top 26%, excluding taxes, for the third quarter in a row and if the rest of those companies that are set to report keep up that pace, that number will reach 27%, in line with Deutsche Bank’s forecast and a slight beat over the prior quarter.
Chadha also points out that corporate margins are climbing to records and adjusted margins are holding steady, and a strong pace of buybacks looks set to carry on, the strategist said.
Read: The Dow just rallied 240 points—here’s a guide to stock-market bounces that may signal what’s to come
The S&P SPX, +0.13% Dow DJIA, +0.26% and Nasdaq COMP, -0.04% are mildly positive as stocks start moving.
Gold US:GCU8 is rebounding off a three-week low, while crude US:CLU8 is down a bit. The dollar DXY, -0.62% is getting creamed by the pound GBPUSD, +1.2141% on a possible post-Brexit deal for U.K. banks. A Bank of England meeting looms as well.
Check out the Market Snapshot column for the latest action.
Europe SXXP, +0.44% is mostly higher and Asia saw a mostly upbeat day outside of a Nikkei drop NIK, -1.06%
We’ll find out later Thursday if Apple AAPL, -0.59% and CEO Tim Cook can charm the market with its results like Facebook FB, -0.90% did on Tuesday—to the surprise of many. Apple earnings are quite an event, which is why our chart of the day is handy as it tells investors exactly what to focus on—the trend in average selling prices:
The chart is provided by Vestact portfolio manager Byron Lotter, who spotted it on Asymco, a website run by Apple analyst Horace Dediu. And as Lotter notes, what investors need to see are those selling prices moving up.
“The blue line is for the all-important iPhone. The new Xs and Xs Max models, which are already on sale, will drag it higher. The green line for iPads is more steady. Watches in orange have actually declined a bit. The yellow line at the bottom is for iPods, which aren’t sold anymore,” explains Lotter, in a note to clients.
“The red line at the top is average selling price in the quarter for all of the Apple Macs sold. That will be bumped up a notch in the coming quarter with this week’s launch of the new, $100 more expensive MacBook Air. It will rise further in 2019 when the refreshed MacBook Pros go on sale,” says Lotter.
Indeed, Apple will command much attention with earnings after the close Thursday. Ahead of that DowDuPont DWDP, +6.31% is climbing after an earnings beat and $3 billion-buybacks announcement. Earnings news also lifted AvonAVP, -8.54%DWDP, +6.31% and SpotifySPOT, -8.04% Also after the bell, Starbucks SBUX, -0.15% Symantec SYMC, -0.72% and GoPro GPRO, +2.89% will report.
Zynga ZNGA, -1.37% could gain on licensing deals for sure-to-be-hot “Harry Potter” and “Game of Throne” games, though results disappointment. Zynga’s CEO told MarketWatch that there is more good stuff in the pipeline. Fitbit FIT, +21.99% is up on the first profit in two years.
Netflix NFLX, -0.89% is changing things up, releasing three big films to the big screen before streaming—“Roma,” the Coen Brothers’ “The Ballad of Buster Scruggs,” and “Bird Box.”
Tesla TSLA, +0.32% CEO Elon Musk has been tweet-storming about “Summon” software that will guide its cars “to your location & follow you like a pet” by pressing a button.
Twitter NFLX, -0.89% aims at fixes for two longstanding user complaints over timeline options and reporting bots and fake accounts.
Employees at Alphabet’s GOOGL, -0.64% Google staged a global walkout over how the company has handled sexual misconduct after an explosive New York Times report.
On the trade beat, new tariffs on China may not happen, said POTUS’s top economic adviser, Larry Kudlow.
Weekly jobless claims dipped, while productivity climbed 2.2% and unit labor costs rose by a smaller amount for the third quarter. Still ahead is the Markit manufacturing purchasing managers index, the ISM manufacturing index and construction spending. Motor sales are also on the way.
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