Weekly Stock Market And Economy Recap: Fed Continues To Appease Markets

S&P 500 earnings update

S&P 500 earnings per share (EPS) increased to $206.77 this past week. The forward EPS is now +30.03% year-to-date.

97.8% of S&P 500 companies have now reported Q2 results. 88% have beaten estimates, and results have come in a combined 15.9% above expectations. The Q2 earnings growth rate is now +97.8%. (I/B/E/S data from Refinitiv)

The S&P 500 index increased +1.52% for the week.

S&P 500 price to earnings (PE) ratio increased to 21.8.

S&P 500 earnings yield is now 4.59%, compared to the current 10-year treasury bond rate of 1.31%.

Economic data review

Existing home sales for July came in at 5.99 million, +2% over the prior month and +1.5% over the last 12 months.

“We see inventory beginning to tick up, which will lessen the intensity of multiple offers. Much of the home sales growth is still occurring in the upper-end markets, while the mid- to lower-tier areas aren’t seeing as much growth because there are still too few starter homes available.”

Months of supply in single family homes ticked up from 2.3 to 2.5, but down from 3.6 at this time last year.

“Although we shouldn’t expect to see home prices drop in the coming months, there is a chance that they will level off as inventory continues to gradually improve. In the meantime, some prospective buyers who are priced out are raising the demand for rental homes and thereby pushing up the rental rates.”

The median sales price of existing homes fell from $362,800 in June, to $359,900 in July. A decline of -0.8% for the month, and the first monthly decline in prices since January, but prices are still up +17.8% over the last 12 months.

New home sales for July came in at 708K, +1% higher than last month (revised up to 701K), down -27.2% over the last 12 months. Monthly declines were led by the Northeast (-24.1%) and Midwest (-20.2%). High prices and lean inventories are starting to take their toll. More on this in the summary section.

The median sales price for new homes increased from $370,200 to $390,500 in July, a gain of 5.5% for the month and prices are up 18.4% over the last 12 months.

Astute readers have asked why I only paying attention to new home sales since its only a small subsection of the housing market. The reason is that new home sales has historically been a better leading indicator for the economy.

My purpose is to take an objective look at the state of the whole economy (along with corporate earnings), as opposed to just the housing market itself. And new home sales has historically been the better of the two in that regard. But I will include existing sales data from now on, so we can all follow along in real time.

Second estimate of Q2 Gross Domestic Product (GDP) came in at an annualized growth rate of 6.6%, which was higher than the first estimate that came in at +6.5%. Real GDP is now +0.82% above the prior high.

Personal Consumption Expenditures minus food and energy (Core PCE) increased 0.3% in July, down from +0.5% in June. The annualized Core PCE remains unchanged from last month, at +3.6%. Core PCE is the Fed’s preferred data point on inflation. At least there wasn’t an increase in the annualized inflation rate, which is a win based on the last few months, but a +3.6% annualized Core PCE is still higher than anything we have experienced since the early 1990s.

Real personal income minus transfer payments increased +0.23% in July, and up +3.82% over the last 12 months. This data point is now only 0.17% away from the pre-COVID high.

Corporate profits soared to a new all time high in Q2, coming in at $2.785 trillion. This represents a growth rate of +9.2% over Q1 and +43.4% over Q1 2020.

Notable earnings

Accounting software provider Intuit (NASDAQ:INTU) reported another strong quarter, with adjusted EPS coming in at $1.97, +24% above street expectations and +9% growth rate. Gross margins improved by 34 basis points, but SG&A expenses increased 81.4%, pushing operating margins down from 26.6% to 15.7%.

Quarterly revenues came in +11% above street expectations, for a growth rate of +41%. The Credit Karma acquisition accounted for a large part of that growth rate, while small business and self employed group revenues grew 30%. The company has now reported $9.633 billion in total sales over the last four quarters—trailing twelve months (TTM).

Intuit raised forward guidance, and the recent strategic moves made will only stabilize future cash flows. The stock is another long term core holding for me, but the current stock price doesn’t seem to offer an attractive entry point. Currently trading 53x forward earnings and 16x sales, and it’s already up +40% this year alone. The stock has a pattern of correcting in the range of 15-20%. I will be looking to add to positions if that were to occur.

Chart of the week

This week's chart comes courtesy of Charles Schwab. The S&P 500 has now gone 200 trading days without a 5% pullback. This has only happened 7 days since the S&P transitioned to 500 stocks in 1957.

They go on to throw some cold water on this feat by highlighting the market's performance afterwards. The average drawdown was -14% (corrections typically fall in the 5-15% range), the average gain one year later was +7.2%, but this is skewed by the +41.9% gain after the 1996 rally. The median gain 1 year later was only +2.6% and the market was higher 1 year later only 43% of the time.

Check out the full post here if you are interested. They also take note of the deteriorating advance/decline line, which was something I highlighted last week.

Summary

This was a big week for monetary policy. Fed Chair Powell, in his speech on Friday, punted on laying out a time table for “tapering” the bond buying program. And highlighted that even if the committee announces tapering plans, it still remains far from meeting the criteria for raising interest rates.

The market apparently loved the overall dovish tone of the speech. I still expect tapering to begin by year's end, but this shouldn’t be feared by investors. Financial market liquidity was a problem at the height of the COVID shutdowns, but it's no longer the case. In fact, you can make the argument that there is too much liquidity in the system, and the Fed should begin unwinding sooner rather than later.

The key economic data point making headlines last week was new home sales. Although we saw a monthly uptick for the 1st time since March, the -27% year-over-year decline is something we typically only see during recessions. A result of low supply and high prices.

Inventories are increasing, but currently much of that consists of homes that aren’t yet completed, which won’t help the immediate problem. Expect the COVID restrictions to continue to hinder progress in the near term but this is not a demand problem. Looking ahead, as more supply comes online, new home sales should continue to grow, and price appreciation could moderate. I wouldn’t read too much into this.

It’s a perfect example of why you shouldn’t base an analysis on any one single data point. I use the legal term “preponderance of evidence,” which means the data as a whole, as opposed to “cherry picking” one or two data points that support a particular outlook or prediction. I see investors fall for this all the time. No two situations are ever alike. Basing analysis and investment decisions on one thing, even if it’s had a great track record in the past, is prone to failure.

Corporate profits have never been stronger, but I’m hearing talk about how earnings are only the result of financial engineering. It’s true, buybacks are getting back to pre-COVID levels and productivity has accelerated at a phenomenal pace. But this profit growth has legs. Let’s look at top line sales for the S&P 500, which everyone agrees, isn’t prone to financial engineering. The above chart shows 87% of S&P 500 companies have beaten estimates.

And results have come in almost 5% above street expectations. Which far surpasses anything we have seen in recent history. This is not a financial engineering story. The earnings yield on the S&P 500 remains almost triple what the 10-year treasury bond rate is, and earnings continue to beat expectations at a level we haven’t seen in a long time.

A market correction could occur at anytime, but its hard to get ultra bearish in this environment. The Fed could be the only thing that messes this up, if they make a policy mistake. But for now, they seem to be doing everything they can to appease markets.

Next week: We have 9 S&P 500 companies reporting earnings. I’ll be paying attention to Zoom Video Communications (NASDAQ:ZM) on Monday, Crowdstrike Holdings (NASDAQ:CRWD) on Tuesday, Veeva Systems (NYSE:VEEV) on Wednesday, and DocuSign (NASDAQ:DOCU) on Thursday.

For economic data, we have consumer confidence on Tuesday, ISM Manufacturing PMI on Wednesday, ISM Services PMI and the BLS employment report on Friday.