“I’ve heard there are troubles of more than one kind; some come from ahead, and some come from behind. But I’ve brought a big bat. I’m all ready, you see; now my troubles are going to have troubles with me!”

Dr. Seuss

And so begins a new year with a new U.S. administration, the question of whether President Trump “brought a bat” or is the bat, up for debate. Love him or hate him, there’s no denying that the new “leader of the free world” is fascinating – like a train wreck maybe but fascinating nonetheless. What will he sign or tweet next? In our conversations with clients, their interpretations of President Trump’s demeanor and policy plans range from “oh my God” all the way to “about time”. As Investment Advisers we try to avoid politics and focus on the Trump effect solely in relation to portfolio management, not an easy task we’ll admit. At least in the short-run, a combination of Trump’s regulatory, spending and taxing plans – at least as the market perceives it so far – and some momentum that was evident before the election has produced a bounty of stock market wealth since the nadir of the market last February.

We are currently in the thick of Q4 earnings season and, so far, the most notable feature is the severity with which negative surprises are dealt. Investors appear to have little patience for earnings misses or uncertain outlooks. Consider as examples, Verizon’s 4.5% decline, Pitney Bowes (-19%) and Automatic Data Processing (-6%), Early data from FactSet shows fewer earnings and revenue beats so far than the latest five-year average. Of course, it is still early and as we saw from Apple’s report Wednesday, the technology sector might just change that. Expectations were that Apple would be the largest drag on IT earnings growth. Consensus earnings estimates for AAPL were for $3.23 for the quarter, a year-over-year decline from $3.28. Apple’s actual results were record quarterly revenue of $78.4 billion and record quarterly earnings per diluted share of $3.36 – and a tidy pile of cash totaling $246.1 billion in the treasury. Facebook was forecast to be the largest contributor to earnings growth and it did not disappoint. Earnings were above estimates and revenues of $8.81 billion handily beat the consensus; the initial price reaction was positive and FB hit an all-time high right out of the gate. But the company’s comments on capex and slower, self-imposed ad growth in 2017 seemed to weigh on the stock and it closed lower on Friday. The good news wasn’t exactly unexpected.

Another bright spot has been the financials as S&P reports that 78% of Financials reported positive earnings surprises. The big banks such as JP Morgan, Citi, Bank of America and Goldman Sachs reported profits higher than expected – in a sector which had already been forecast to see improvement. At yearend, consensus earnings growth estimates for the Financials was a respectable 14.4% and as reports have come in that has moved up to 18.8%.

Results from Industrials have been a bit more mixed and as we have mentioned before, that is not surprising since this economic sector encompasses a wide range of companies. Of the companies that have reported, approximately 55% beat, 29% missed and 16% came in as expected; however, as a whole, Industrials earnings are expected to post a year-over-year decline for the fourth quarter.

Energy companies are again forecast to be a large drag fourth quarter earnings. FactSet’s blended year over year earnings for 2016 are for a decline of 82%. However, analysts are extremely optimistic regarding 2017 earnings (+496%) due to higher oil price expectations and easy comparisons from last year.

The S&P 500 index blended earnings expectations currently are for a 4.20% growth rate for the fourth quarter year/year – about a percentage point higher than the estimate on December 31st. Since we are only halfway through earnings season it is possible that we end up with an even higher growth rate if the trend of earnings beats continues at the 67% pace. The earnings recession was primarily an energy affair but earnings more generally have been pretty flat the last couple of years. With energy earnings expected to recover – assuming oil prices can stay up in the face of increasing supply from shale companies and OPEC cheating – overall earnings growth may indeed accelerate. Whether that will be enough to justify the post-election market surge is just one more thing that will make 2017 a very interesting year.

February 2, 2017

Margarita V. Fernandez

Vice President – Alhambra Investment Partners, LLC

 

“Wealth preservation and accumulation through thoughtful investing.”

 

For information on Alhambra Investment Partners’ money management services and global portfolio approach to capital preservation, Margie Fernandez can be reached at:

 

305-233-3774

mfernandez@4kb.d43.myftpupload.com