Market Insights: Positive Reactions

Macroeconomic and Market Developments:

• North American markets were strong again this week, with large cap indices hitting new all-time highs. In Canada, the S&P/TSX Composite Index was up 1.38%. In the U.S., the Dow Jones Industrial Average increased 1.08% and the S&P 500 Index was up 1.66%.
• The Canadian dollar was almost flat this week, closing at 80.86 cents vs 80.82 last Friday.
• Oil prices were up again this week. US West Texas crude closed at $84.11 vs $82.29 last week. The Western Canadian Select price closed at $68.93 vs $67.41 last week.
• Gold prices were positive this week, closing at $1,794 vs $1,767 last Friday.
• An internal power struggle has emerged at Rogers Communications (RCI.b). Reports have surfaced that Chairperson Edward Rogers is looking to replace certain members of the board of directors. In late September, he tried to force out Chief Executive Officer Joe Natale and replace him with Chief Financial Officer Tony Staffieri. He has publicly stated that there is “room for improvement” in the company’s performance. In turn, the board voted to remove him as Chairperson of the Board, although he remains a board member.
• On Tuesday, the world’s first Bitcoin Futures ETF started trading in the U.S., launched by ProShares. This development is different from the previous Bitcoin ETFs that are currently available in Canada in that it doesn’t own Bitcoin, but only trade in futures contracts on the cryptocurrency. Excitement surrounding the approval by the SEC for this new ETF pushed the price of Bitcoin to a record high of $66,972, before pulling back to finish the week at $60,842.
• Netflix (NFLX) released earnings after the market closed on Tuesday. The company beat earnings estimates with $3.19/share vs $2.56/share estimated; revenue came in right on estimates at $7.48 billion; and closely followed global paid net subscriber additions came in at 4.40 million vs 3.84 million estimated, in large part due to the huge success of Squid Game.
• Tesla (TSLA) also beat earnings estimates, releasing their earnings after the market closed on Wednesday. Adjusted earnings came in at $1.86/share vs $1.59 expected and revenue came in at $13.76 billion vs $13.63 billion expected.
• U.S. Industrial production declined 1.3% in September, much lower than the expected gain of 0.1%. Every major category that goes into the calculation declined. Reasons for the decline include lingering effects from Hurricane Ida and ongoing supply chain issues.
• Canadian inflation data came out this week, with the Consumer Price Index (CPI) rising 4.4% year over year for the month of September, slightly higher than estimates of a 4.3% rise. On a month over month basis, inflation rose 0.2%, above the 0.1% rise estimated, and its ninth straight monthly increase.
• Also in Canadian economic news, Canada’s Retail Sales rose 2.1% in August to $57.2 billion, which was in line with estimates. Statistics Canada provided an early estimate showing Retail Sales declining 1.9% in September.
• Here is a link to a short video from Canaccord’s chief U.S. Strategist Tony Dwyer entitled Not Stagflation: DWYER VLOG

Weekly Diversion:

Check out this video of the first ever World Balloon Cup.

Charts of the Week:

Before discussing the subject heading this week, with Bitcoin hitting a new all-time high this week moving above US$66,000 for the first time, it seemed a good time to show a one-year chart of the most popular cryptocurrency.

Source: CoinDesk

When we say ‘positive reactions’, we are referring to how investors are reacting to corporate earnings reports this past third quarter. Over the past year or so, earnings reports have been strong; however, the reaction to those reports have not been particularly rewarding. We are witnessing a different story this quarter, where stocks are finally reacting positively to companies that beat estimates on earnings and/or revenue. With most information already priced into securities, it is the earnings/revenue beat or miss that often moves the needle, and perhaps even more important, is the guidance that companies provide for the following quarter and year in terms of how the stock reacts to quarterly results.

Although we are still relatively early on the earnings season, there have been approximately 20% of the S&P 500 stocks post results thus far, a large enough sample size to get a relatively clear picture. As noted in the graphic, we are seeing strong rates with over 87% of companies beating earnings per share estimates and almost 75% beating on revenue. This trend is the same sort of dramatic pace we have seen since the middle of last year. This quarter so far, earnings have been slightly better than last quarter and revenue slightly worse, but both still very strong. With these charts, we are only showing the companies that have reported so far this quarter, and only using that same cohort of companies for previous quarters so that we are comparing apples to apples.

Source: Bespoke Investment Group

Getting back to how stocks are reacting to these results, here one can see that when companies are beating expectations, we are finally observing much better reactions to the upside with the average one-day post-result gain being 1.57%. Notice, however, in the second half of last year and the first quarter of this year, even though we had strong beat rates, we actually had negative reactions to positive earnings reports. This response is a changing theme the last two quarters, which is a positive overall for the direction of the stock market. As we have mentioned in previous commentaries, the strongest correlation to the direction of the stock market is the direction of earnings growth.

Source: Bespoke Investment Group

Lastly, another positive sign, forward guidance provided by companies remains very strong with almost 13% of companies raising earnings guidance. This inference, along with the last few quarters, is about as strong as forward guidance gets. In fact, the second quarter of this year was the strongest guidance in the last 20 years. We are also viewing guidance cuts staying very low historically, with only about 2% of companies lowering expectations this quarter so far. We will note that for this sample of companies, guidance tends to be low and volatile from quarter to quarter, but regardless this paints a clear picture that these management teams are in general still feeling increasing confidence on their outlook even after a string of strong quarters over the past year.

Source: Bespoke Investment Group

 

Sources: CNBC.com, Globe and Mail, Financial Post, BNN Bloomberg, Tony Dwyer, Canaccord Genuity, First Trust, Bespoke Investment Group, CoinDesk