“Nobody’s expectations are going to be more than mine.”
-Ezekiel Elliott
While I have no idea if Zeke is as bullish on US profit growth as we’ve been this year, he’s obviously bullish on himself. You want that in a professional. Some people aren’t confident in themselves because they shouldn’t be.
Fantasy Football fans had to be happy with their Dallas Cowboys running back this past weekend. Elliott delivered on high expectations, running for 147 yards and 2 touchdowns! As for me, my Hedgeye Fantasy team has been godawful this year.
I have 1 win and 6 losses. While my opponents have beat expectations (scoring 800 points against me already) my offensive player selection would make a 2017 US Growth Bear look good. It’s embarrassing.
Back to the Global Macro Grind…
Josh Balch, Darius Dale, and I spent the last 2 days meeting with Institutional Investors in Boston, MA. Since our US GDP #GrowthAccelerating call isn’t very controversial anymore, the most interesting debates we’ve been having with clients have to do with The Profit Cycle.
Since we’re purely data dependent when it comes to measurable matters like rates of change in growth, inflation, and profits, what I love about a new day of meetings right now is that we’re getting big batches of Earnings Season data.
As of last night’s S&P 500 Earnings Reports:
- 139 of 500 have reported Q317 results
- Aggregate year-over-year SALES growth = +5%
- Aggregate year-over-year EPS growth = +7%
And for the growthier Nasdaq 100:
- 23 companies have reported Q317 results
- Aggregate year-over-year SALES growth = +13%
- Aggregate year-over-year EPS growth = +51%
That +51% growth number is not a typo. In your non-fantasy world of delivering alpha (i.e. your day job), the growthier your US Equity portfolio has been in 2017, the more impressive your performance has been.
To be straight up about it, we meet with some clients who are flat out giddy about their performance this year. We also meet with some clients who feel the way I do about my Fantasy Football team. That’s what makes a market.
What’s next for The Profit Cycle? The 2nd theme in our Q4 Global Macro Themes deck is titled Profits vs. Tax Reform. Some of the most important takeaways from the profits part of our presentation are as follows:
- US Profits are ripping this year because they were comparing against a 2015-2016 #ProfitRecession
- The easiest year-over-year earnings comparisons are now in the rear-view
- But those comparisons don’t get glaringly difficult until Q1 of 2018
And while there’s a central tendency for clients who have been bearish to cling to the negative catalysts we’re highlighting in 2018, it’s also important to note that plenty of clients are right jacked up about what could continue to be bullish in 2017.
While it’s almost mathematically impossible to not see year-over-year earnings slow in Q1 of 2018, we won’t get those earnings reports until April of 2018. In between now and then, both Q3 and Q4 of 2017 need to be reported.
What’s impressive about Q3 Earnings Season to-date is that (so far) companies are “comping the comps.” In rate of change speak, that means growing against more difficult comparisons. If you look at the “comps” in Q3 vs. Q2:
A) The comparative periods’s base EPS growth rate for the SP500 went from a -3.9% in Q2 to a +3.3% in Q3 = harder “comps”
B) And 9 out of 11 SP500 Sectors have base effects (comps) get more difficult in Q3 vs. Q2
If you look at one of our favorite Sector Styles in 2017 (Tech):
A) The comparative period’s base EPS growth rate went from -2.7% in Q2 to +6.1% in Q3
B) But so far 18 of 68 Tech companies in the SP500 have reported aggregate y/y EPS growth of +36%!
Who knows where Q3 ultimately shakes out, but by my math +36% is greater than +16%... and the +16% is what S&P Tech Earnings grew in Q2 of 2017. Not only has Tech EPS growth been accelerating in 2017, but it is handily beating expectations.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.31-2.45% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 9.21-11.44 (bearish)
YEN 112.32-114.49 (bearish)
Oil (WTI) 50.75-52.84 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
