Earnings Are Up Over 50% So Far

CommentaryThrough last Friday, 88% of the S&P 500 companies have announced second-quarter results. According to FactSet Earnings Insight, an astounding 86% of them have reported positive earnings-per-share surprises, and 76% reported positive revenue surprises. For the full quarter so far, the earnings growth rate (blended, year-over-year) is up by an astounding +50.4%. This is also the 12th quarter in a row in which earnings are exceeding sales growth, indicating an expansion in profit margins, and this is why stocks are rallying.Contrary to August’s dismal historical record, this August could deliver a big rebound, due to: (1) the rapid growth rate of quarterly earnings, (2) the exhaustion of mean reversion algorithms, (3) the implosion of “Situational Awareness,” and (4) recognition that unscrupulous short sellers are spreading false narratives.Going into August, the market was grossly oversold and poised for this kind of powerful rebound, so last week, NASDAQ rose 5.2%, the S&P 500 gained 3.6%, and gold rose even faster, by 8.7%.Also, third-quarter GDP figures look strong so far, as I have been predicting, even though second-quarter GDP growth came in at just 1.5% (annual pace), due mostly to an inventory build-up and the fact that the trade deficit rose, as we saw massive imports of CPUs and GPUs from Taiwan and memory from South Korea.Here are the most important developments recently and what they mean:- The biggest news this week is expected to be the July Consumer Price Index (CPI) on Wednesday and the Producer Price Index (PPI) on Thursday. Economists are expecting a 0.1% increase in the CPI and a 0.2% increase in the PPI. If inflation comes in lower than expected, it will likely cause Treasury yields to meander lower and take further pressure off the Fed to raise key interest rates.- Taiwan Semiconductor Manufacturing (TSM) announced that its revenue rose 5.6% in July (compared to June) and 44.7% in the past 12 months to $14.51 billion. This revenue growth is above TSM’s guidance and bodes well for the entire semiconductor industry. The only possible negative component is that the U.S. trade deficit is expected to continue to rise due to all the technology imports from TSM and other Asian companies that manufacture CPUs, GPUs, and memory chips. A higher trade deficit from technology imports curtailed second-quarter GDP growth.- Phillips 66 (PSX) is coming to the rescue for California, which now has to import approximately 30% of its specialty blended gasoline from South Korea and India. Specifically, Phillips 66 is proceeding with a $5 billion project, called the Western Gateway Pipeline system, to build a 900-mile pipeline to ferry 230,000 barrels a day of gasoline, jet fuel, and diesel from the Texas Panhandle to Arizona and California. In Phoenix, the new pipeline will connect with an existing 500-mile pipeline that ends in Colton, Calif., about an hour east of Los Angeles.- What has been causing refineries to close in California is it regulates diesel not be made from crude oil, but rather organic material like soybeans. As a result, California refineries have been closing since when you refine a barrel of crude oil, you typically get 19 gallons of gasoline and 12 gallons of diesel. The remaining California refineries now have to ship the diesel made from crude oil to other markets, like Mexico and China.- Despite a deal between Oman and Iran being “close,” the Strait of Hormuz remains largely closed, so crude oil prices are meandering higher. All energy stocks in our portfolio are performing well due to the chaos surrounding the Strait of Hormuz, since a U.S. Navy blockade remains in place. Iran’s top security official has resigned and been replaced by another IRCG official.  Whether this leadership change is significant remains uncertain, but clearly who is in charge of Iran remains in flux.- Bloomberg had an excellent article entitled “AI-Dominated Leveraged ETFs Are Rattling Markets.” Although only 1% of ETFs are leveraged, Bloomberg pointed out how these leveraged ETFs are causing excess volatility in the underlying stocks. There are some legacy ETFs with 3 times leverage, but new filings for 3 times leverage are now being increasingly rejected due to liquidity concerns. Prediction markets are growing in popularity, and leveraged ETFs now seem to be catering to the crowd that follows prediction markets. My only consolation is that corporate earnings are now so strong that the wild trading swings that occurred in July have been muted by the reality that record sales, earnings, positive guidance, and rising order backlogs are real.In summary, the U.S. remains an oasis and is largely not impacted by the bottlenecks surrounding the Strait of Hormuz. We are in the middle of a strong earnings season, but the stock market is a bit overbought in the near term, so do not be surprised if it backs and fills a bit. There are still many great stocks announcing earnings this week, like Super Micro Computer (SMCI).