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US Earnings Extravaganza

US Earnings Extravaganza- Australian Investment Education. With now three quarters of the S&P500 having reported their quarterly earnings. Many are labelling this strength in markets as something of a ‘bubble’ on strong earnings and stretched valuations. However, is this really the case? Here’s why this market may be ‘bubilicious’ rather than a ‘bubble’:

How US earnings reports work

The US earnings cycles are very different from how it works here in Australia. And before we dive into the details of some of these reports – it’s important we first understand how US earnings reports work. In the US, publicly listed companies are legally required to report or ‘announce’ their financials every quarter, thus four times per year.

This allows investors to have good guidance on a particular company more often than not. Compared to the likes here in Australia where companies are only required to report semi-annually. The only downside to this of course is that we see typically see more volatility in markets around earnings more times per year in the US. Which may pose itself as a threat. Or an opportunity depending on which lenses you look through.


Dissecting earnings reports

Today we are going to look through the non-traditional lenses that most old-school investors would use to dissect these most recent earnings reports in the US. Traditionally, the Price to Earnings ratio (PE ratio) has been an important component of corporate announcements. As it provides guidance as to the company’s valuation (price), based on its earnings.

The market historically has traded at a PE ratio of around 22x. To which now post COVID – we’ve seen the market trade more around the 27-28x earnings posing significant concerns for what old-school investors would call a ‘bubble’. However, host Andrew Baxter chooses to look at this very differently in so far as Earnings Per Share (EPS).

The consensus’ on EPS figures has been exceeded by more than three-quarters of S&P500 listed companies – meaning companies are exceeding expectations to the upside dramatically. Overvalued in a traditional sense. Yes, yet producing such insatiably positive results. That would indicate maybe their high prices are justified.

When making claims that tech titans like Apple (AAPL) are overvalued for example may seem like the right call in tradition. However, this is a company having just produced $89 billion of revenue in just the last quarter (crazy, right?) which is a 54% jump on what it did last year. Overvalued? Well, not with those kinds of numbers says host Andrew Baxter.


The “giga caps” versus everyone else

This is a really polarised discussion to be having after their most recent earnings. As we have seen the big boys, the market titans or the ‘giga caps’ (Amazon, Google, Facebook, Netflix etc.). Place themselves in a situation where it is them versus everyone else.

Quite frankly, it’s almost as though the rules may be slightly different for the big boys versus the little boys. Posing cause for concern within markets despite these companies reporting such ridiculously strong earnings. The giga caps, as host Andrew Baxter exclaims, simply are choosing to pay tax as an optional exercise – for example, Netflix only paid 1% federal tax in the most recent quarter. Despite the Joe Biden administration raising the corporate tax rate and levy on high-income earners.

It doesn’t make any sense, right?  These companies are simply SO big that that they have become impervious to any government intervention. Which thus drives their earnings and results higher along with their price per share. 

The continuance of earnings growth

This is really the crux of understanding earnings reports – we’re buying businesses today for what they could be worth in the future. Earnings reports are a great snapshot as to what’s happen. However, the guidance on these earnings (their projections into the future) is what really counts.

As in the case of tech companies that would appear on the surface to be ludicrously overvalued – you have to ask yourself, are they going to be a bigger or smaller part of the future world we live in? In fact, out of the S&P500 companies who have reported this quarter – on average. They have exceeded their EPS consensus by 23%.

Clearly, things are changing, and the traditional methods of valuation are no longer relevant. Understanding earnings reports and how to use them. To make a buck is something taught at Australian Investment Education. Reach out to learn more.

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