Greed - Modest Decline In Stocks On Thursday
There appears to be no Greed in the stock market. After hitting its record high a day prior, the stock market fell on Thursday. Even though the durable goods orders report and jobless claims beat estimates.
S&P 500 fell 0.53%, Nasdaq fell 1%, and the Russell 2000 fell 1.2%. Even though Facebook beat revenue and profit estimates, its stock fell 1.93%. That’s a decent sized reversal from the rally after-hours on Wednesday. It opened higher, but immediately sold off.
That’s even as J.P. Morgan, Morgan Stanley, Bank of America, Jefferies, Deutsche Bank, Evercore ISI, and Mizuho all raised their price forecasts. I don’t think investors should worry about this weakness. If you’re buying Facebook now, you get the knowledge of its great quarter for free. VIX rose 5.55% to 12.74 just after I said it was very low on Wednesday.
Stocks Up 20% Year To Date, Yet No Greed
Greed - CNN fear and greed index fell 2 points as it went from greed to neutral. Even though stocks have had an amazing year, it’s not wrong.
As you can see from the chart below, the AAII investor sentiment survey shows there are more bearish individual investors than bullish investors. 31.7% are bulls and 32% are bears.
Even though everything has gone right, investors aren’t optimistic. Maybe because they’d rather see very quick economic growth than the economy staying in a slowdown.
The economic outlook could change after a trade deal. But by the time everyone knows a trade deal will be made, the gains will have been had. Investors becoming more bullish should lead to solid gains.
Obviously, just because investors aren’t euphoric doesn’t mean stocks will rise. It’s important to note because those looking at the S&P 500’s year to date gain of 19.82% probably assume there is intense euphoria.
Greed - Latest Earnings Update
Big earnings announcements on Thursday were from Amazon and Alphabet. Before I get to them, let’s look at the updated aggregate results. As of Thursday afternoon, 42% of the S&P 500 had reported Q2 earnings results. 5% of firms reported earnings on Thursday alone.
By the end of next week, earnings season will be mostly over. Investors will turn their attention to Q4 earnings estimates. Those are starting off stronger than any other quarter this year.
76% of firms have beaten EPS estimates and 63% have beaten sales estimates. Non-GAAP EPS growth is 5.48% and sales growth is 4.71%. Blended EPS growth improved from -0.56% to 0.65%. These results are all from The Earnings Scout.
To me, it seems like Q2 earnings growth will be below Q1’s rate based on The Earnings Scout’s numbers and growth will be above Q1’s rate based on FactSet’s numbers. Both firms will show that Q2 EPS growth is positive. There was no earnings recession.
Amazon Misses Estimates Sharply
Greed - Amazon reported disappointing earnings results because AWS missed estimates. It seems like Azure is continuing to take market share. Q2 EPS was $5.22 which missed estimates for $5.57. Revenues were $63.4 billion which beat estimates for $62.5 billion. That’s 20% growth from last year and 16.8% growth from Q1.
Amazon’s profit center AWS had $8.38 billion in revenue which missed estimates for $8.5 billion. The chart below breaks down the firm’s revenue by segment. Revenues from online stores and 3rd party sellers determine overall revenues and AWS determines profits.
One positive aspect of the profit miss is Amazon is spending more money to achieve 1 day free shipping for Prime members. Currently 10 million items can be shipped for free in 1 day with Amazon Prime.
Greed - Amazon investing for a better future is a positive.
Amazon has been known to make big investments which have lowered its taxes paid. This $800 million investment compressing margins probably explains why this big EPS miss only caused the stock to fall 1.66% after-hours.
Amazon’s profit Q3 forecast was way below estimates. It expects operating income to be from $2.1 billion to $3.1 billion which is below the consensus of $4.4 billion. AWS had 37% revenue growth which is below Q1’s growth of 41% and way below Azure’s growth of 64%.
Azure is smaller, but it is catching up. In my opinion, the most exciting new Amazon business is online ads. The “Other” division, which includes online ads, had revenue growth of 37% as sales reached $3 billion.
Alphabet Destroys Estimates
Greed - Alphabet reported $14.21 in EPS which destroyed estimates for $11.30. Revenues were $38.94 billion which beat estimates for $38.15 billion.
As you can see from the chart below, revenue growth accelerated to 19.2%. These amazing results sent the stock up 8.27% after-hours. Traffic acquisition costs were $7.24 billion which came in below estimates of $7.27 billion. Paid clicks on Google properties were up 28% and cost per click fell 11%.
Just like Azure, Google’s cloud division is taking share from AWS. To be clear, Google’s division is much smaller than the 2 giants. Google’s other revenue business which includes Pixel and cloud was $6.18 billion which is up from $4.43 billion last year. That’s 39.5% growth.
In February 2018, the cloud brought in $1 billion per quarter; it now has an annual run rate of $8 billion. Last quarter, Alphabet blamed YouTube for its revenue growth weakness.
YouTube did well this quarter. It was the firm’s 2nd largest contributor to revenue growth. The firm’s ad revenue is still its bread and butter. That revenue increased from $28.09 billion last year to $32.6 billion this quarter.
Greed - Conclusion
Stocks fell on Thursday as earnings season continued. The market might rise on Friday because of Alphabet’s amazing quarter. Only big tech firm left to report is Apple which goes on Tuesday.
We have seen great results from Microsoft, Facebook, and Alphabet. The results from Netflix and Amazon were weak. Decline in revenue growth at AWS is a big challenge for Amazon.
Overall, S&P 500 earnings have been ok. The average EPS beat isn’t as good as Q1, but then again, Q1 had a lower bar to jump over.