Big US Stocks’ Q1’19 Fundamentals

The US stock markets sure feel inflectiony, at a major juncture. After achieving new all-time record highs, sentiment was euphoric heading into this week. But those latest heights could be a massive triple top that formed over 15 months. Then heavy selling erupted in recent days as the US-China trade war suddenly went hostile. The big US stocks’ just-reported Q1’19 fundamentals will help determine where markets go next.

Four times a year publicly-traded companies release treasure troves of valuable information in the form of quarterly reports. Required by the US Securities and Exchange Commission, these 10-Qs and 10-Ks contain the best fundamental data available to traders. They dispel all the sentiment distortions inevitably surrounding prevailing stock-price levels, revealing corporations’ underlying hard fundamental realities.

The deadline for filing 10-Qs for “large accelerated filers” is 40 days after fiscal quarter-ends. The SEC defines this as companies with market capitalizations over $700m. That currently includes every stock in the flagship S&P 500 stock index (SPX), which contains the biggest and best American companies. The middle of this week marked 38 days since the end of Q1, so almost all the big US stocks have reported.

The SPX is the world’s most important stock index by far, with its components commanding a staggering collective market cap of $24.9t at the end of Q1! The vast majority of investors own the big US stocks of the SPX, as some combination of them are usually the top holdings of nearly every investment fund. That includes retirement capital, so the fortunes of the big US stocks are crucial for Americans’ overall wealth.

The major ETFs that track the S&P 500 dominate the increasingly-popular passive-investment strategies as well. The SPY SPDR S&P 500 ETF, IVV iShares Core S&P 500 ETF, and VOO Vanguard S&P 500 ETF are among the largest in the world. This week they reported colossal net assets running $271.9b, $175.1b, and $111.5b respectively! The big SPX companies overwhelmingly drive the entire stock markets.

Q1’19 proved extraordinary, the SPX soaring 13.1% higher in a massive rebound rally after suffering a severe correction largely in Q4. That pummeled this key benchmark stock index 19.8% lower in just 3.1 months, right on the verge of entering a new bear market at -20%. By the end of Q1, fully 5/6ths of those deep losses had been reversed. Did the big US stocks’ fundamental performances support such huge gains?

Corporate-earnings growth was expected to slow dramatically in Q1, stalling out after soaring 20.5% last year. 2018’s four quarters straddled the Tax Cuts and Jobs Act, which became law right when that year dawned. Its centerpiece was slashing the US corporate tax rate from 35% to 21%, which naturally greatly boosted profits from pre-TCJA levels. Q1’19 would be the first quarter with post-TCJA year-over-year comparisons.

Big US stocks’ valuations, where their stock prices are trading relative to their underlying earnings, offer critical clues on what is likely coming next. By late April the epic stock-market bull as measured by the SPX extended to huge 335.4% gains over 10.1 years! That clocked in as the second-largest and first-longest bull in US stock-market history. With the inevitable subsequent bear overdue, valuations really matter.

Every quarter I analyze the top 34 SPX/SPY component stocks ranked by market cap. This is just an arbitrary number that fits neatly into the tables below, but a dominant sample of the SPX. As Q1 waned, these American giants alone commanded fully 43.7% of the SPX’s total weighting! Their $10.9t collective market cap exceeded that of the bottom 437 SPX companies. Big US stocks’ importance cannot be overstated.

I wade through the 10-Q or 10-K SEC filings of these top SPX companies for a ton of fundamental data I feed into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighting in the SPX and SPY, and market cap as of the final trading day of Q1’19. That’s followed by the year-over-year change in each company’s market capitalization, an important metric.

Major US corporations have been engaged in a wildly-unprecedented stock-buyback binge ever since the Fed forced interest rates to deep artificial lows during 2008’s stock panic. Thus the appreciation in their share prices also reflects shrinking shares outstanding. Looking at market-cap changes instead of just underlying share-price changes effectively normalizes out stock buybacks, offering purer views of value.

That’s followed by quarterly sales along with their YoY change. Top-line revenues are one of the best indicators of businesses’ health. While profits can be easily manipulated quarter to quarter by playing with all kinds of accounting estimates, sales are tougher to artificially inflate. Ultimately sales growth is necessary for companies to expand, as bottom-line profits growth driven by cost-cutting is inherently limited.

Operating cash flows are also important, showing how much capital companies’ businesses are actually generating. Companies must be cash-flow-positive to survive and thrive, using their existing capital to make more cash. Unfortunately many companies now obscure quarterly OCFs by reporting them in year-to-date terms, lumping multiple quarters together. So if necessary to get Q1’s OCFs, I subtracted prior quarters’.

Next are the actual hard quarterly earnings that must be reported to the SEC under Generally Accepted Accounting Principles. Lamentably companies now tend to use fake Pro-forma earnings to downplay real GAAP results. These are derided as EBS profits, Everything but the Bad Stuff! Certain expenses are simply ignored on a Pro-forma basis to artificially inflate reported corporate profits, often misleading traders.

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