Huge Friday Rally
I am calling Friday’s rally “huge” because every point the market rallies, makes this an even more fantastic year. The S&P 500 was up 0.74% on Friday which means it is now up 20.7% year to date. This performance is over 1% better than the fantastic year that was 2017. The best year in this expansion was 2013 when the S&P 500 gained 29.6%. That was the best year since 1997 when the S&P 500 gained 31.01%. The best year since 1928 was in 1933 when the S&P 500 gained 46.59%. If you annualize the current gains, the S&P 500 would easily surpass the returns in 2013, but I don’t like to do that because the market can easily fall. The market can reach infinity, if you keep annualizing gains, but we need to be realistic.
No Euphoria. Where Is A Correction Going To Come From?
The CNN fear and greed index increased 5 points to 60 which isn’t that high considering how well stocks have done recently. It’s still being held down by junk bond demand. The VIX cratered 4.55% to 12.16 which is very low. The problem with betting on volatility is I don’t see anything that will cause a correction. There isn’t euphoria and the economy is muddling along. If growth was too hot, I’d worry about inflation.
The biggest potential catalyst for a correction might be the Fed not guiding for a 2nd rate cut this year. With such a strong rally in the stock market and solid real final sales in Q2, there might not be enough weakness to justify continued easing. On the other hand, if the global economy turns higher and Trump makes a trade deal, then that positive news would cancel out the negative of the Fed not cutting rates or even guiding for a hike next year. The odds have shifted in favor of 2 rate cuts instead of 3. The chance of at least 2 rate cuts is 48.7%.
Details Of Friday’s Action
The Nasdaq had a fantastic day as it also hit a record high; it was up 1.11%. Amazon stock only fell 1.56% on its bad earnings report which is basically nothing. Alphabet rallied an enormous 10.45% on Friday which now puts its market cap at $863 billion. I’m bullish on Alphabet and think it will hit a $1 trillion market cap in the next 6 months. The Russell 2000 was up 1.12%. Many bears have supported their opinions by showing how much small caps have underperformed. I find that silly as the index is up 17.09% year to date. I don’t see it hitting its record high any time in the next few months, but that’s not a reason to be bearish. It’s underperformance mostly came in the 2nd half of last year, not this year.
The best 2 sectors on Friday were consumer staples and communication services which were up 1.19% and 3.25%. Obviously, Alphabet drove the latter’s performance. The only 2 down sectors were energy and industrials which fell 0.5% and 0.17%.
Latest Earnings Summary
Communication services has been one of the best sectors this earnings season as you can see from the chart below. So far, the sector has an amazing 15.03% earnings growth which is the 2ndhighest. Its average earnings surprise of 14.02% is the highest by far. 9 firms in this sector have reported which accounts for 41% of the total. Overall results have improved since the last time I reviewed them. 44% of firms in the S&P 500 have reported Q2 results. 76% have beaten EPS estimates as their growth rate is 5.47%. The average surprise rate is 2.6%. Growth is being driven lower by tech. Apple will have a big impact on that next week. Overall, sales growth is 4.39% as 62% of firms have beaten revenue estimates.
Boeing’s Weak Quarter Driven By 737 Max
Because so many earnings reports came out this week, I didn’t have room to cover them all. Now let’s look at Boeing and Starbucks' earnings results which were released on Wednesday and Thursday. Boeing reported a massive loss because of the issues caused by its 737 Max which is still grounded after 2 crashes which killed passengers. The firm lost $5.82 per share. It lost $2.9 billion which is its biggest loss ever. This terrible report caused its stock to fall 7.52% in the past 3 days. The 737 Max caused the firm to take a $4.9 billion charge last week. Boeing delivered 104 fewer planes than last year. Revenues of $15.8 billion fell 35% from last year. The CEO stated, “This is a defining moment for Boeing.” The company might need to shut down production if the 737 Max’s expected return to service gets delayed further.
Starbucks Reports Fantastic Earnings
Starbucks’ results are the polar opposite of Boeing’s as it beat on the top and bottom line. It reported EPS of 78 cents which beat estimates by 6 cents. Revenues were $6.82 billion which beat estimates for $6.67 billion. Global same store sales growth was 6% which beat estimates for 4%. The firm also raised its full year EPS and revenue forecast. It expects full year non-GAAP EPS of $2.8-$2.82 instead of $2.75-$2.79. It expects sales growth of 7% instead of 5% to 7%. These amazing results sent its stock up 8.83% on Friday to a new all-time high.
American same store sales growth was 7% which beat estimates for 4.4%. Traffic growth was 3%. American loyalty members were up 400,000 to 17.2 million. The firm took an equity stake in restaurant tech firm Brightloom to help get its mobile app to global customers. Last quarter, I discussed the competition from Luckin Coffee in China. That didn’t hurt Chinese same store sales growth as it was 6%, with traffic growing 3%. 1/3rd of the 442 net new stores were in China as Starbucks aims to appeal to the Chinese customer’s desire to pickup coffee and go. In tune with that, Starbucks is partnering with Alibaba to deliver drinks. In America, Starbucks will make delivery via Uber Eats nationwide in 2020.