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Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings

Takeaway: Earnings estimates appear untethered from reality.

Editor's Note: This is a special Hedgeye Guest Contributor note written by Mike O'Rourke. Mike is the Chief Market Strategist at JonesTrading where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.”

 

Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - earnings cartoon 04.12.2016

 

Now that Q2 earnings season has commenced, it is an opportune time to examine the expectations landscape. 

 

According to Standard & Poor’s, 2015 earnings finished at $100.45, down from $113.01 in 2014.  The current forecast for 2016 earnings is $113.96. Considering Q1 2016 earnings were down 7% year over year, it obviously makes 13% full year earnings growth a tall order. Per the S&P data, the last 6 quarters have posted year over year declines.  Despite that disappointing trend, Q2 earnings are forecast to rise 7% year over year. As is typical, earnings estimates are very back end loaded, allowing more time to deny reality. 

 

For Q3, earnings are forecast to grow 19% year over year, and in Q4, they are forecast to grow a whopping 37% year over year (chart below).  Of course, quarterly earnings in excess of $30 per share would be new record levels (chart below).  For some reason, this does not seem like an environment primed for posting record quarterly earnings.

 

Certain aspects of the environment that led to the peak in earnings in 2014 softened, but they have not reversed.  The Dollar remains relatively strong.  Although the Dollar index is down 4% from its recent peak, it is still up over 20% from the 2014 level from which it broke out.  While Crude has managed a remarkable rebound from its February low, the average price of spot WTI was $48.65 in 2015, and thus far in 2016, it is just over $40. 

 

The volatility around earnings due to the broad decline should fade and this is expected to be the Energy Sector’s first positive earnings quarter since the end of 2014.  The Health Care sector will be key, and is expected to do much of the heavy lifting for index earnings, growing close to 30% in 2016 (table below).  Considering Q1 earnings for the sector only grew 3.3% year over year, Q2, Q3 and Q4 are forecast to grow 31.7%, 37.7% and 40.5% respectively.  There is not much else based on reality in the markets these days, so maybe there is no reason to expect earnings estimates to be any different.

 

Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - z a

 

Hedgeye Guest Contributor | O'Rourke: Fairy Tale Earnings - z aa


Daily Market Data Dump: Thursday

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, and key currency crosses. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Thursday - equity markets 7 14

 

Daily Market Data Dump: Thursday - sector performance 7 14

 

Daily Market Data Dump: Thursday - volume 7 14

 

Daily Market Data Dump: Thursday - rates and spreads 7 14

 

Daily Market Data Dump: Thursday - currencies 7 14


The Big Healthcare Themes - Institutional Call Today

Takeaway: We don't believe that the U.S. Medical Economy growth recovery of 2014 -2015 is durable.

The Big Healthcare Themes - Institutional Call Today - z hc

 

Hedgeye Healthcare analysts Tom Tobin and Andrew Freedman will provide a comprehensive overview of our #ACATaper and Healthcare Deflation themes with new datasets and analysis. 

 

The U.S. Medical Economy remains extended after the largest expansion in insured medical consumers in a generation.  Slowing growth in medical consumers, continued deterioration in affordability, aggressive payor reforms, company leverage at 15-year highs, and multiples at 10-year highs is a recipe for downside.  

 

We don't believe that the U.S. Medical Economy growth recovery of 2014 -2015 is durable, but rather a temporary boost in consumption driven by massive government stimulus.

 

The chart below is from our team's +100-slide deck.

The Big Healthcare Themes - Institutional Call Today - z xxc

 

We are also extremely pleased to announce that Emily Evans, Director of Health Policy at Hedgeye, will be joining the presentation and sharing her views on major policy initiatives including Alternative Payment Models, MACRA, and post-acute reform, among other topics that significantly impact our fundamental views.

 

**Email sales@hedgeye.com for access.


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CHART OF THE DAY: Hubris? Tesla's Quest For The Driverless Car

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Managing Director Neil Howe. Click here to learn more.

 

"... As head of Hedgeye’s new Demographic Sector, on Monday I wrote a Hedgeye column called “Driverless Cars: Unsafe at Any Speed: Why Fully Autonomous Vehicles are Still a Long Way Off.” I won’t recap the piece here (you can read it yourself), but my basic argument focuses on (1) the absurd overconfidence in the ability of today’s AI and sensors to replace the higher-order thinking of human drivers; (2) the all-or-nothing contradiction of semi-automatic driving; and (3) the obvious revulsion with which people will respond to machines that kill them at random." 

 

CHART OF THE DAY: Hubris? Tesla's Quest For The Driverless Car - driverless 3


Cartoon of the Day: Clueless

Cartoon of the Day: Clueless - Fed  Haven t a clue  cartoon 07.13.2016

 

The Fed-induced bubble in financial markets has undoubtedly made the rich richer while its easy money policies have devalued the purchasing power of average Americans.


Capital Brief: Who's On Trump & Clinton's VP Short List

Takeaway: Stronger Together...; Worth More Than A Bucket Of Warm Spit?; Trump Stump;

Editor's Note: Below is a brief excerpt from Hedgeye Potomac Chief Political Strategist JT Taylor's Capital Brief sent to institutional clients each morning. For more information on how you can access our institutional research please email sales@hedgeye.com.

 

Capital Brief: Who's On Trump & Clinton's VP Short List - JT   Potomac under 1 mb

 

“The ballot is stronger than the bullet.”

Abraham Lincoln

STRONGER TOGETHER...

In a long-awaited and highly-anticipated speech, Bernie Sanders delivered an impassioned endorsement of Hillary Clinton while she rallied the crowd with the message that Democrats are unified and ready to take on Donald Trump in the fall. In the end, Sanders has much to feel good about – he’s helped shape the most progressive platform in Democratic party history.

 

The remaining question is whether or not the Clinton-Sanders relationship will actually blossom, and if she will be able to fully win over his supporters - many of whom are still reeling that he left the race before the convention.

WORTH MORE THAN A BUCKET OF WARM SPIT?

This may be the year where the veep selections carry more weight than in years past - dating back to JFK’s critical pick of LBJ. Trump’s decision could be a make or break moment for legions of Republicans and undecided party leaders. The push to unify and reassure has Trump seriously considering Governors Mike Pence and Chris Christie, former House Speaker Newt Gingrich, and Senator Jeff Sessions.

 

Clinton on the other hand, faces a much different situation. Her progressive moves within the party platform have helped her make progress with the wing she would most likely need help from and appears to be shifting her focus to VA Senator Tim Kaine, Labor Secretary Thomas Perez, and now Admiral James Stavridis. Title courtesy of VP John Nance Garner.

TRUMP STUMP

Trump continues to surprise - now adding Senate Majority Leader Mitch McConnell to his growing list of convention speakers - all to be announced later today. McConnell, who will attend as a delegate and a speaker, endorsed Trump shortly after he clinched the nomination in early May, but has since kept his distance given the steady drumbeat of Trump’s controversies. McConnell’s participation is another step in the right direction for Trump, but he still lags in winning over other key party types - including his main primary rivals.


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