Big US Stocks’ Q4’18 Fundamentals

The widely-held mega-cap stocks that dominate the US markets recently finished reporting their Q4’18 financial results. Because the tenor of stock markets changed radically last quarter, this latest earnings season is more important than usual. An extreme monster bull market suddenly rolled over into a severe near-bear correction in Q4. How major corporations fared offers insights into whether a young bear is upon us.

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.

While 10-Qs with filing deadlines of 40 days after quarter-ends are required for normal quarters, 10-K annual reports are instead mandated after quarters ending fiscal years. Most big companies logically run their accounting on calendar years, so they issue 10-Ks after Q4s. Since these annual reports are larger and must be audited by independent CPAs, their filing deadlines are extended to 60 days after quarter-end.

So the 10-K filing season just wrapped up last Friday, revealing how the biggest and best US companies were doing in Q4’18. They are the stocks of the flagship S&P 500 stock index (SPX). At the end of Q4, they commanded a gigantic collective market capitalization of $22.2t! 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 fund.

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 $262.4b, $160.5b, and $103.2b respectively! Overall stock-market fortunes are totally dependent on big US stocks.

Q4’18 proved extraordinary. Leading into it, the SPX hit a dazzling all-time record high in late September about a week before Q4 arrived. That extended an extreme monster stock bull to 333.2% gains over 9.5 years, the 2nd-largest and 1st-longest in all of US stock-market history! But as I warned days after that euphoric peaking, the Fed’s unprecedented quantitative-tightening campaign would finally ramp to full speed in Q4.

Stock markets artificially inflated by $3625b of Fed QE over 6.7 years couldn’t react well to Fed QT finally starting to unwind that epic monetary inflation. With QT hitting $50b per month starting in Q4, the stock markets indeed wilted. Over the next 3.1 months into Christmas Eve, the SPX plummeted 19.8%! That was right on the verge of a new bear market at -20%. The SPX suffered its worst December since 1931, -9.2%.

That sure looked like a young bear market, really freaking out traders. But since those deep and ominous lows, the SPX has soared 19.3% at best in a massive rally! That has reversed nearly 4/5ths of the total correction losses largely suffered in Q4. This looked and acted like a classic bear-market rally, rocketing higher to eradicate fear and restore universal complacency. New-bear worries have shriveled to nothing.

Given Q4’18’s colossal stock-market inflection and subsequent huge rebound, whether the SPX narrowly evaded the overdue-bear bullet or not is supremely important. Bear markets exist for one reason, to maul overvalued stocks back down below historic fair-value levels. So how the major US corporations actually fared last quarter, how large their earnings were compared to their stock prices, offers essential bull-bear clues.

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 is a dominant sample of the SPX. At the end of Q4, these American giants alone commanded fully 43.7% of the SPX’s total weight! Their $9.7t collective market cap exceeded that of the bottom 437 SPX companies. Big US stocks’ importance cannot be overstated.

I wade through the 10-K or 10-Q SEC filings of these top SPX companies for a ton of fundamental data I dump into a spreadsheet for analysis. The highlights make it into these tables below. They start with each company’s symbol, weighing in the SPX and SPY, and market cap as of the final trading day of Q4’18. That’s followed by the year-over-year change in each company’s market capitalization, a key 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 changes. 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. Using cash to make more cash is a core tenet of capitalism. Unfortunately, many companies are now obscuring quarterly OCFs by reporting them in year-to-date terms, lumping in multiple quarters together. So the Q4’18 OCFs shown are mostly calculated by subtracting Q3’18 YTD OCFs from full-year ones.

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