S&P 500 Earnings And Market Update

The company also issued positive guidance for Q1 2021. Expecting +23.6% revenue growth and operating margins increasing to 25.0%. Perhaps the biggest takeaway from this report is the company’s guidance on cash flow. Netflix is confident enough in its financial position that it plans to start returning cash back to shareholders, most likely in the form of buybacks.

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The company generated over $25 billion in trailing revenue. A compounded annual growth rate of around 30% over the last 10 years.

While trailing operating income has gone from almost non-existent to over $4.5 billion.

Looking at those financial results helps explain the long-term outperformance of the stock since it IPO’d in 2002. The stock trades 60x forward earnings for a reason. As a result of the earnings report, the stock has gapped up above its prior trading range (roughly $460 to $570) its been in for the last 5 months. Assuming the price holds above $570, the next measure move target comes in around $660. Another stock I’ve owned for years, no intentions to sell anytime soon but won’t be buying anymore at these price levels either.

Market Internals

A quick look at the market internals show no bearish divergences developing. The S&P 500 advance-decline line continues making new all-time highs, showing broad level of participation.

91% of S&P 500 companies currently trade above their 200-day moving average. As we discussed last week, there are signs of the market being overbought in the short term. But I see no signs of weakness typically associated with the end of bull markets.

Japan’s stock market index continues to perform well, breaking out to 30-year highs.

While Germany is another international market making new all-time highs.

Summary: It’s all about earnings and interest rates. Earnings continue to smash expectations, while rates are nowhere near high enough to pose a valuation threat. 10-15% market corrections can happen anytime, and often without rhyme or reason, but its hard to imagine a sustainable bear market with an earnings beat rate consistently above 80% and rates at 1%. With about 23% of the S&P 500 index reporting earnings this week, we’ll get a clearer picture of how Q4 will turn out and how Q1 will look.

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