S&P 500 Earnings Update

S&P 500 earnings per share (EPS) declined from $206.77 to $206.75 this week. A very modest decline, but it had been 22 straight weeks of EPS increases. The forward EPS is +30.02% year-to-date.

99.4% of S&P 500 companies have now reported Q2 results. 88% have beaten estimates and results have come in a combined +15.8% above expectations. The Q2 EPS growth rate is now +95.6%.

The S&P 500 index increased +0.58% this week, for yet another record close.

The S&P 500 price to earnings (PE) ratio increased to 21.9.

The S&P 500 earnings yield is now 4.56%, compared to the 10-year Treasury bond rate of 1.32%.

Economic Data Review

Consumer confidence declined in August, coming in at 113.8 (down -9% for the month, but +31.9% over the last 12 months), which was well below expectations. July was revised lower as well, from 129.1 to 125.1.

17.8% expect business conditions to worsen in the next six months (up from 11.9% last month), while 22.9% expect business conditions to improve in the next six months (down from 30.9%). The short-term labor market outlook deteriorated slightly, while short-term financial prospects showed a modest decline as well.

The ISM Manufacturing Purchasing Managers Index (PMI) for August came in at 59.9, the 15th consecutive month in expansion territory. All six of the biggest manufacturing industries registered moderate to strong growth for the month.

New orders increased +1.8% to 66.7%.

Input costs actually declined 6.3% to 79.4%, which means costs are still increasing but at a slower pace. But it's the first monthly reading below 80% since December 2020.

The ISM Services Purchasing Managers Index (PMI) for August came in at 61.7, the 15th straight month in expansion territory.

New orders came in at 63.2, down from 63.7 last month, but still well in growth territory.

Prices (or input costs) continue to rise, but the pace of the advance is moderating. The prices index came in at 75.4, down from 82.3 last month.

The BLS monthly labor report missed expectations, with a net gain of +235 thousand jobs in August (the street was expecting around 720 thousand). There were some bright spots: net job gains for June were revised higher (from +938 thousand to +962 thousand), and July was revised higher as well (from +943 thousand to +1,053 thousand), for a net of +134 thousand job gains higher than previously reported. Total private payrolls increased +243 thousand.

We have now recovered 76.4% of the job losses due to COVID-19, but we still remain with a net 5.333 million jobs below the pre-COVID-19 peak. Monthly job gains have averaged +586 thousand this year. If this pace were to continue, a full jobs recovery would occur in a little over nine months (May 2022).

Wage inflation was evident. Average hourly earnings were +0.6% for the month (from $30.56 to $30.73).

Notable Earnings

Docusign (DOCU) reported another strong quarter with adjusted EPS coming in at $0.47, +18% above expectations and illustrating +176% growth.

Quarterly revenue came in +5% above expectations, for a +50% growth rate. Subscription revenue grew 52%. The company has now reported $2.137 billion in sales over the last 4 quarters (TTM). They projected around 40% sales growth next quarter and 45% sales growth for the full fiscal year.

Gross margins increased from 74% to 78% for the quarter, while operating margins improved from -17.1% to -4%. TTM operating margins are now -7.7%, which is the best its been since going public. It looks like Docusign is on its way to becoming GAAP profitable next year.

Free cash flow grew +62% for the quarter, led by a +50% gain in operating cash flow. The company has now reported almost $500 million in free cash flow over the last 4 quarters.

These were strong results, and forward guidance was well above expectations. This report checked all the boxes. The strength in international sales was most impressive (+71% growth, now 22% of total revenue). Also the company’s customer count now exceeds 1 million. I don’t see this as just a “COVID” stock. People want convenience and Docusign provides that.

The stock may have broken out from a year trading range. At 33x sales and 137x cash flow, the stock is not cheap by any means. However, I actually added to the position after earnings results with the understanding the stock could fall back within the prior trading range.

Chart of the Week

Historic Q2 earnings growth is a global phenomenon. In the US, Q2 earnings growth is now coming in at +95%. But in other parts of the world, earnings are growing even faster. The above chart shows the Q2 growth rate for the STOXX600, which is the index for Europe, coming in at +248%.

Foreign stocks have lagged US stocks have a long time, but for investors with extra cash and worried about US stock valuations, foreign stocks may be a good place to turn. They could very well continue to lag US stocks, but they currently offer higher dividend yields and lower PE ratios.

Summary

No problems on the earnings side. Companies continue to report stellar results and beat market expectations. The economic data was mixed, with the ISM Services & Manufacturing continuing to show the economy is bouncing back strong despite the supply chain issues.

But the consumer confidence and jobs report shows signs that economic growth could moderate a bit more than expected. But it's still too soon to tell. And as I’ve highlighted numerous times, it's against the backdrop of strong earnings, record low interest rates, and fiscal/monetary stimulus.

In regards to the BLS labor report, market participants are going to look through the report and speculate on the Fed’s next move. The Fed is in a bind, the net job gains were well below expectations (which could give them room to delay “tapering” plans), but the wage inflation was clear.

In my opinion, they really should start reducing their bond buying program as soon as possible. It’s low hanging fruit. Yes, the market could have a short-term negative reaction, but they would get over it. Interest rates would still be at 0%. They really don’t want to risk getting behind this. Inflation could be transitory, but so far there is little to no data that shows a return to normalized inflation rates. The FOMC event in a few weeks will be important. Not just for the statement, but for the updated projections on interest rates and the economy.

Next Week

Next week is a holiday-shortened one. Only two S&P 500 companies will be reporting earnings. For economic data we have the Producer Price Index (PPI) on Friday.