S&P 500 Earnings Update

S&P 500 earnings per share (EPS) increased to $206.32 this week. The forward EPS is now +30% year-to-date. 95% of S&P 500 companies have now reported Q2 results, 87% have beaten estimates, and results have come in a combined +15.8% above expectations. The Q2 earnings growth rate is now +94.7%.

The S&P 500 index declined 0.59% for the week.

S&P 500 price to earnings (PE) ratio is now 21.5, down from 21.7 last week due to an increase in earnings and a decrease in price.

The S&P 500 earnings yield is now 4.65%, compared to the 10-year Treasury bond rate of 1.26%. Fixed income still offers no competition to stocks in terms of valuation. There are still those that focus only on the PE. If stocks are expensive, then bonds are ridiculously expensive. It’s all relative.

Economic Data Review

Total retail sales for July came in at $617.7 billion, a decrease of -1.1% for the month but still up +15.8% over the last 12 months and +17.5% above the pre-COVID-19 high. June was revised higher to +0.7%.

The monthly decrease was led by motor vehicle & parts dealers (-4.1%), non-store retail + e-commerce (-3.1% month), and clothing (-2.7% month). The biggest gains came in the miscellaneous store retailers (+3.4%), gasoline (+2.3%), & food service and drinking (+1.7%).

Industrial production increased +0.9% in July, and +6.6% over the last 12 months. Capacity utilization increased from 75.4% to 76.1%. Industrial production has now recovered 98.8% of the COVID-19 losses.

The Conference Board Leading Economic Index (LEI) increased a better-than-expected +0.9% in July, now at 116. June was revised down from 115.1 to 115, while May was revised up from 114.3 to 114.4.

The LEI is now +10.6% higher over the last 12 months, and +5.4% over the last six months. This is well into growth territory.

Notable Earnings

Nvidia (NVDA) reported another strong quarter. Adjusted EPS came in +13.3% above expectations for a growth rate of +280%. Gross margins came in at 64.8%, which was an improvement both sequentially and year-over-year. Operating income grew +275% on a GAAP basis. The company projected sales growth of 44% for Q3, with further margin expansion.

Nvidia reported quarterly sales of $6.5 billion, which demonstrates a growth rate of 68% and is 3% above expectations. There was strong growth along all product lines, with record revenue for gaming (+85% growth) and data centers (+35% growth).

This makes $21.9 billion in sales over the last four quarters, or trailing twelve months (TTM).

TTM revenue growth rate is now +67.6%.

Operating cash flow over the last four quarters has now soared to a company record of $7.9 billion.

The stock trades about 51x forward earnings and 25x sales, so it is far from cheap but not quite as expensive as The Trade Desk (TTD), either. Maintaining a full position in the company, they are obviously killing it and poised for further growth. I’d add to the position if the price ever fell to the $160 area, about a 25% decline from most recent highs.

Chart of the Week

The S&P 500 doubled from the March 2020 low point in a record 354 trading days. This is the fastest recovery in the post-WWII era. It goes to show what strong earnings, low rates, and government stimulus can do.

The COVID-19 recession was different in a lot of ways. It wasn’t a result of over-investment, it was a product of shutdowns. But you simply can’t turn an economy off and on like a light switch. We are dealing with the repercussions now, as supply chains are damaged and inflation is the result.

Summary

The economic data this week was mixed. Retail sales came in below expectations, but industrial production and the LEI came in higher. Earnings continue to increase and rates remain low. The Jackson Hole Symposium will be the main event next week.

It will be interesting to see what comes out of the Symposium, and it will also be interesting to see how the market reacts to whatever comes out. I have zero interest in trying to predict what may happen. I’d rather just react to whatever the market gives me. If the market freaks out about the bond buying reduction plans, just remember that they are doing it because the economy is on solid footing.

I am monitoring a minor bearish divergence on the New York Stock Exchange advance/decline line (chart above). While the S&P 500 had been making new record highs up until this week, the advance/decline line has made no progress since June; making lower highs in succession. It’s too early to tell whether this is a sign of exhaustion or consolidation for the next leg higher.

Perhaps market participants are on hold, waiting to hear what comes out of the Jackson Hole Symposium. Next week could be the determining factor for the market's next move. If this is the start of the long awaited, perfectly normal and healthy (and much needed) pullback, get your shopping list ready. Otherwise, enjoy the ride.

Next Week

We have 13 S&P 500 companies reporting earnings. I’ll be paying attention to Intuit (INTU) on Tuesday and Salesforce (CRM) on Wednesday. For economic data, we have new home sales on Tuesday, our second look at Q2 GDP on Thursday, and Personal income & Core PCE inflation reading on Friday. The Jackson Hole Symposium will begin Thursday, and extend through Saturday.