Focused on Fundamentals
April 27, 2018
The market posted a strong session yesterday as fundamentals continue to prove that the early enthusiasm in the economy and stock market wasn’t misplaced. And yet, after opening higher this morning, stocks again turned south. There are several surveys showing that confidence in the market is plunging. I’ve been fighting hard to underscore the reasons to believe in this economy and stock market, but a number of factors from political hijinks in Washington, D.C. to growing debt to anxiety over interest rate policies have taken a toll.
The biggest problem is that lower sentiment only triggers even deeper declines in sentiment, coupled with wild gyrations and sessions with monumental point declines. As for active investors, I continue to say a big problem is indifference – a number of investors are calling themselves neutral.
History has shown over and over again that the above sentiment figures should actually be the exact opposite, with bullishness surging in a down market as opportunities develop.
Can Strong Earnings Reverse the Trend?
The stock of the day yesterday was Facebook (FB), which powered away on amazing earnings and confident guidance. The company must continue to grapple with the notion of tweaks to the business model and higher taxes and fees, but as management stays committed to its advertising model, will the public flee out of privacy concerns? A recent poll suggests that may be a problem.
Then there is Amazon (AMZN), which crushed it once again after the close last night. Earnings of $3.27 a share were 157% better than expected and operating income of $1.93 billion beat the estimate of $1.04 billion. Revenue came in at $51 billion and Amazon Web Services – the company’s cloud computing services – brought in sales of $5.44 billion and operating income of $1.4 billion.
Intel (INTC) beat on revenue and posted earnings of $0.87 a share, which was $0.15 more than estimated. Management also raised guidance, and I suspect this news could spark a major reversal in semiconductors, though we’re not yet seeing that in the early Friday trading action. Microsoft’s (MSFT) numbers were also strong, beating on both the top and bottom lines.
Here are some of the other earnings highlights:
- Western Digital (WDC) beat on revenue and earnings, with the bottom line beating by $0.32.
- Baidu (BIDU) absolutely crushed it, sending its shares up 11% in after-hours trading and keeping it up for the day as the market turned south.
- Starbucks’ (SBUX) results were largely in line, and the stock mostly shrugged as a result.
- United States Steel (X) got smoked after its results hit the Street and it’s still getting smoked today.
So, will these results be enough to reverse the trend of lower highs?
Thursday was a great session, picking up from the previous day when the Dow Jones Industrial Average climbed off the canvas to erase a 200-point decline. I’d like to see a test of 24,321 on the upside, and from there the big breakout comes at 24,544.
Still, the market is obviously skittish. I hate these periods, but I say look at the fundamentals. If folks want to sell stocks in a strong economy because the 10-year yield is 3% or earnings are “too good,” then I say let them. I’m ready to buy the dip….at some point.