Earnings Growing Stronger Than Expected But Revenues Not Keeping Pace
Markets began the week with strong earnings reports and indices powered to new highs. Enthusiastic reports from Microsoft and Meta Platforms got the ball rolling. The Fed announcement on Wednesday was a non-event with Fed Chair Powell all but definitively saying there would be no rate cut coming. So, markets took their cue from earnings. Then came Amazon earnings Thursday night, and a weak jobs number Friday that needs to be discussed.
Amazon reported strong numbers after the close last Thursday, but they didn't keep pace with competitors. I discussed this last week in my piece on Friday. The jobs number released Friday was well below expectations and the downward revisions over the past couple months were some of the biggest we've ever seen. While a revision of that size is arguably a statistical anomaly, and deserving of looking into, President Trump instead decided to fire the Bureau of Labor Statistics commissioner in charge of the report. I'm not going to comment on the politics of this, what I will simply say is, injecting skepticism in numbers the market is reliant upon, and businesses depend on for forecasting purposes, is a slippery slope.
Turning back to earnings, according to FactSet, based on earnings that have been reported and earnings estimates, we are on track for growth of 10.3%. That would be a fantastic figure and well ahead of the 4.9% that was forecast at the end of June. If there is any concern within that number, it's the estimated revenue growth rate which is currently tracking at 6%. If revenues are growing 6% and earnings are growing over 10%, that means profit margins are growing. The question becomes how. One answer might be companies are simply becoming more efficient at what they do, which could be a result of AI. Another possibility lies in the aforementioned possibility that less people are working, reducing overhead costs and boosting profit margins.
We have another big week of earnings announcements this week. After the close today, Palantir Technologies will announce. The options market is pricing in an expected move of nearly $18 for the week. Before the open tomorrow, Caterpillar is scheduled to report. We'll also hear from Pfizer after the close tomorrow which will be interesting as pharmaceutical companies are being targeted for tariffs.
Turning to the economy, while last week's jobs report was weak, it certainly shored up hopes for a rate cut in September. Heading into the number, expectations for a quarter-point cut were just over 60%. After the report, that number jumped to just over 80% according to the CME Fed Watch Tool. There is no meeting scheduled for August. Looking at the economic calendar this week, there isn't a lot to get excited about but that doesn't mean a report that is often overlooked won't draw attention.
On the tariff front, August 12th is a date to keep in mind as that is when the extension with China is set to expire. I'm also listening on earnings calls for more details on the impact of tariffs. Last week, Apple said tariffs will cost them $1.1B in the current quarter. Other companies, who pulled through a lot of inventory earlier this year in an effort to keep costs low, or have eaten tariff costs, are openly acknowledging they will begin passing some costs through to consumers. Procter & Gamble plans to increase prices by an average of 2.5% on roughly one-quarter of U.S. goods beginning this month.
For today, I'm watching VIX, which closed on Friday well over 20. I also mentioned Friday some more obscure measures of volatility creeping higher. We are still up 23% from the April lows, which is incredible. I think this is a time to be prudent and evaluate positions. If you're nervous, it's okay to take a little off the table or use some of those gains to buy a put. If you're someone who dollar cost averages, we've had about a 3% pullback in the S&P 500 and maybe you want to start looking around for underlyings where you want to acquire a position. As always, I would stick with your investing plans and long-term objectives.
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