The second quarter: The beginning of technology development, or another historic high?
The first quarter began to happily. In January, the stock market was at an all-time high, but it eventually fell into chaos. The first is inflation concerns in February, as well as tariffs and trade wars in March. This led to worries about big technology, making it the first quarter of decline since September 2015.
Second quarter disagreements about the market. There are two key facts to keep in mind: The S&P 500 has closed its historical high of only 7%, while earnings are expected to increase by 20% in the first quarter and continue along this path for the rest of the year.
If you are not familiar with income growth, 20% is a huge number. Not surprisingly, the long-term average annual growth rate of the S&P 500 index is about 7%.
Lesson: Stocks tend to track future earnings expectations over the long term.
There is almost no income growth of 20%, especially after such a bull market. “I have never seen such strong revenue growth late in the earnings cycle,” Nicholas, who tracks earnings under the nickname of a profit scout, told CNBC.
However, the profit outlook is being overshadowed by technical concerns. Facebook, Google, Apple, Amazon and Twitter and Tesla all weighed on the market in March.
Raich agrees. “The overall market has not been overestimated, but certain technologies have been overestimated,” he said, pointing out that semiconductor and semiconductor capital equipment stocks may fall back.
The size of the technical space has become a problem in the trade community. Technology stocks accounted for 25% of the S&P 500 Index, far exceeding the largest industry. Five technology stocks – Apple(AAPL), Alphabet(GOOGL), Microsoft(MSFT), Facebook(FB) and Amazon (AMZN)(Amazon is technically classified as a consumer-selectable stock) – together account for 15% of the entire S&P 500 index.
Expectations of revenue around technology are also too large. It is expected that the technical and financial returns in the first quarter will be almost double that of the rest of the S&P 500 Index.
Technology: Growth 23%
Finance: Growth 24%
Industry: 15% increase
Disadvantages. Staples: Increase 10%
Consumer CD: 9% increase
Source: Thomson Reuters
Not surprisingly, the market can become dizzy even if there is even a small threat to technology revenue expectations. The threat is not small. The survival crisis facing Facebook and social media, regulatory issues and technical issues for driverless cars (a problem faced by the semiconductor industry) are likely to drive profitability.
Raich is optimistic about the annual revenue and earnings guidance. Part of his optimism is based on the powerful trend he has already seen. So far, 19 companies have reported the first quarter earnings (these companies are often the companies that ended their quarter in February).
The result is much higher than expected. The revenue growth rate of these 19 companies is 31%, and the income growth rate is an astonishing 12%.
Raich said that this is the best start for these early companies in 20 years. “This growth is not just from stock repurchases,” he said. “We are getting top-line growth.”
When will it end? In the second quarter, the third quarter and fourth quarter earnings are still rising. Surprisingly, they rose in 2018 almost every week.
His “slowing down” argument is what he calls a “delta” – the growth rate of earnings has slowed down.
“When income growth starts to slow down, you know you are close to the top,” he told me.
He is expected to happen in the third quarter.