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Q2 Earnings Repeat for Q3: FAAMGs Vs Everyone Else?

Q3 Earnings Preview: It’s The FAAMGs Vs Everyone Else

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This article was originally published by ZeroHedge.

Q3 Earnings Preview: It's The FAAMGs Vs Everyone Else Tyler Durden Mon, 10/12/2020 - 14:31
As previewed earlier, tomorrow Q3 earnings season officially kicks off with a number of financial companies leading the way. We’ll hear tomorrow from Johnson & Johnson, JPMorgan Chase, Citigroup and BlackRock. Then on Wednesday, we have UnitedHealth Group, Bank of America, ASML, Wells Fargo, Goldman Sachs and United Airlines. Thursday sees releases from Morgan Stanley and Walgreens Boots Alliance. And on Friday we’ll get earnings from Honeywell International and BNY Mellon. A summary of this week's reporters is below courtesy of Earnings Whispers: This week's earnings aside, Goldman's David Kostin over the weekend minimized the importance of Q3 earnings for the broader market, which he listed as third in order of importance behind a Covid vaccine and the elections. There is a reason why the Goldman strategist may want to minimize the importance of the next 4 weeks, because as he admits, the consequences of the semi-frozen economy on an uneven road to recovery will be visible in 3Q results: consensus expects 3Q S&P 500 EPS will decline by 21% on a year/year basis, following a 32% drop in 2Q and a 15% fall in 1Q. Including the anticipated 14% fall in 4Q, Goldman's full-year 2020 EPS estimate of $130 reflects a 21% year/year decline from the 2019 level, which also means that Goldman is using a 28x PE multiple to get to its year-end S&P target of 2020. Which, frankly, is hilarious and is only made possible by the Fed's constantly manipulation of the so-called "market." In keeping with the K-shaped recovery theme, it will be a story of two earnings seasons: one for the giga caps, and another for everyone else. Consider this: the 5 largest S&P 500 stocks – AAPL, MSFT, AMZN, GOOGL, and FB – are expected to grow 3Q sales and EPS by +13% and +1%, respectively, compared with -5% and -24% for the rest of the S&P 500. The disparity is even more apparent across indices. While S&P 500 EPS is expected to fall by 21%, consensus forecasts earnings for the small-cap Russell 2000 index will fall by 40% Drilling down in the coming earnings report, Goldman sees three themes characterizing results across most sectors.
  • First, a collapse in margins, with aggregate index-level margins compressing by 220bps on a Y/Y basis to 8.7%. For context, although the margin decline n 3Q will represent a slight improvement from the peak pandemic decline in 2Q (-223 bp to 8.6%), it will still register as the lowest level of margins since 2010.
  • Second, the modest 3% decline in aggregate sales will mask the bi-modal story beneath the surface. Cyclical sectors will suffer sharp revenue declines led by Energy (-32%). In Industrials, a 15% fall in sales will lead to a 62% plunge in EPS as the sector suffers from elevated operating leverage. Banks earnings are expected to decline by ~25% as pre-provision net revenues continue to deteriorate, despite smaller expected reserve builds. In contrast, Health Care (+5%), Consumer Staples (+4%), and Info Tech (+3%) are expected to post positive sales growth. As usual, large-cap stocks are better positioned for 3Q than small-cap stocks. Investors have exhibited a preference for size in 2020 with the S&P 500 climbing by 8% YTD vs. -1% for the Russell 2000. And, as noted above, while S&P 500 EPS is expected to fall by 21%, consensus forecasts earnings for the small-cap Russell 2000 index will fall by 40%
  • Third, most managements will still be reluctant to provide forward earnings guidance. According to Factset, around 52% of the 285 companies that have historically provided EPS guidance stated that they were not providing EPS guidance or confirmed a previous withdrawal of EPS guidance for either FY 2020 or FY 2021. Almost all of these companies cited the uncertainty of the future economic impacts of COVID-19 as the reason for not providing or withdrawing EPS guidance for the full year. At the sector level, the Consumer Discretionary (33) and Industrials (27) sectors had the highest number of companies withdrawing or not providing annual EPS guidance. On the other hand, 138 S&P 500 companies provided EPS guidance for FY 2020 or FY 2021. Of these 138 companies, 59 provided annual EPS guidance that was higher than the previous guidance issued by the company, 41 maintained previous (annual) EPS guidance, 26 provided annual EPS guidance that was lower than the previous guidance issued by the company, and 12 initiated annual EPS guidance (no prior guidance issued). At the sector level, the Health Care (31) and Utilities (26) sectors had the highest number of companies issuing annual EPS guidance. According to Goldman, "the uncertain timeline of a vaccine that is essential for the normalization of the economy, the stalled talks between the Trump administration and Congress on an interim fiscal package, and the contentious election that is only 25 days away are all valid reasons for executives to minimize forward-looking commentary." However, consensus 2021 EPS estimates have recently troughed and started to turn positive.
Alongside Goldman, Deutsche Bank has also published its own earnings forecast, which has a slightly more upbeat tone to it: As DB's Binky Chadha writes, Q2 reporting season saw S&P 500 earnings beat at an unprecedented rate (granted these were beats to extremely pessimistic estimates) both in terms of breadth (85%) and size (+20%), prompting historically rare, strong upgrades to forward estimates, especially for the cyclicals, and one of the strongest earnings season rallies on record. And while the bottom-up consensus for Q3 is for a "sharp" rebound in headline earnings, the bulk of it is being driven by reductions in loan loss provisions and Energy sector losses. Excluding these, underlying earnings growth is forecast to barely move up (-15% to -13%), despite rising Q3 GDP growth estimates pointing to a strong macro rebound. This to Chadha suggests the consensus is likely again underestimating the bounce in earnings and, if so, "the question is whether the market will rally on above-average beats or election uncertainty will cap gains." Below are some more observations from the Deutsche Bank chief strategist:
  • "Q3 marks the beginning of a rebound in earnings. The bottom-up analyst consensus now sees S&P 500 EPS growth rising from -32.6% yoy in Q2, which was the worst since 2008-09, to -18.6% in Q3. The improvement in growth is being driven by both sales (from -9% in Q2 to -4% in Q3) as well as margins (-273bps in Q2 to -171bps in Q3)."
  • Wide variation in growth across stocks and sectors persists. Similar to the last two quarters, median company growth is running significantly above the headline aggregate, pointing to the impact of large outliers.
  • Cyclical industries (-67% to -41%) are expected to continue to see steeply negative growth, driving almost all of the aggregate decline in S&P 500 earnings, while earnings for the defensives (-1.5% to -3.2%) are expected to be down only slightly, and for the Mega-Cap Growth and Tech stocks (-3.7% to +1%) to in fact be slightly up.
  • Growth expected to continue moving higher but remain negative next quarter, before turning positive in 2021. The consensus sees growth moving up further in Q4 (-13%), turning positive in Q1 2021 (+12%) and surging in Q2 2021 (+45%) due to base effects. Consensus estimates for 2020 ($130) and 2021 ($167) have been creeping higher but we see room for them to rise further.
  • The bulk of the sharp rebound in consensus estimates is being driven by reductions in loan loss provisions and Energy sector losses. Much as in Q1 and Q2, aggregate S&P 500 growth in Q3 continues to be disproportionately impacted by movements in loan loss provisions by the Financials and Energy sector losses.
  • Loan loss provisions, which tend to be lumpy and front loaded, are expected to fall from $53bn in Q2 to $22bn in Q3, adding almost 9pp to S&P 500 growth. A bounce in oil prices has meant a smaller drag from Energy sector losses in Q3, helping overall S&P 500 growth rise by almost 3.4pp. Together, these two drivers account for more than 12pp of the 14pp rise in consensus S&P 500 earnings growth from Q2 to Q3.
  • Underlying earnings growth is forecast to barely move up in Q3. Growth excluding the impact of loan loss provisions and Energy losses, which DB claims "is a better indicator of underlying growth", is forecast to barely move higher in Q3, from -15% to -13%. This reflects consensus factoring in very little for a fundamental recovery in growth.
  • Q3 GDP growth estimates on the other hand have been moving steadily higher and are for a very strong rebound. Reported macro data has continued to surprise to the upside and in turn consensus GDP forecasts for Q3 have been rising steadily for the last 6 months and now stand at +25.3% (qoq ar), compared to -31.4% in Q2. DB’s economists see Q3 growth coming in higher, at +31.8% and tracking estimates are running even higher (+33.3%).
  • Meanwhile, Q3 EPS consensus estimates have been rising since the Q2 earnings season...
... but have lagged the improvement in GDP estimates, suggesting room for strong beats as well as upward revisions. Finally, early reporters have posted large beats so far. While only a handful of companies have reported Q3 earnings so far (19), almost all of them have beat estimates (18), with the aggregate beat running at 20% (median 14%).

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Analyst reviews Apple stock price target amid challenges

Here’s what could happen to Apple shares next.

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March 12, 2024

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They said it was bound to happen.

It was Jan. 11, 2024 when software giant Microsoft  (MSFT)  briefly passed Apple  (AAPL)  as the most valuable company in the world.

Microsoft's stock closed 0.5% higher, giving it a market valuation of $2.859 trillion. 

It rose as much as 2% during the session and the company was briefly worth $2.903 trillion. Apple closed 0.3% lower, giving the company a market capitalization of $2.886 trillion. 

"It was inevitable that Microsoft would overtake Apple since Microsoft is growing faster and has more to benefit from the generative AI revolution," D.A. Davidson analyst Gil Luria said at the time, according to Reuters.

The two tech titans have jostled for top spot over the years and Microsoft was ahead at last check, with a market cap of $3.085 trillion, compared with Apple's value of $2.684 trillion.

Analysts noted that Apple had been dealing with weakening demand, including for the iPhone, the company’s main source of revenue. 

Demand in China, a major market, has slumped as the country's economy makes a slow recovery from the pandemic and competition from Huawei.

Sales in China of Apple's iPhone fell by 24% in the first six weeks of 2024 compared with a year earlier, according to research firm Counterpoint, as the company contended with stiff competition from a resurgent Huawei "while getting squeezed in the middle on aggressive pricing from the likes of OPPO, vivo and Xiaomi," said senior Analyst Mengmeng Zhang.

“Although the iPhone 15 is a great device, it has no significant upgrades from the previous version, so consumers feel fine holding on to the older-generation iPhones for now," he said.

A man scrolling through Netflix on an Apple iPad Pro. Photo by Phil Barker/Future Publishing via Getty Images.

Future Publishing/Getty Images

Big plans for China

Counterpoint said that the first six weeks of 2023 saw abnormally high numbers with significant unit sales being deferred from December 2022 due to production issues.

Apple is planning to open its eighth store in Shanghai – and its 47th across China – on March 21.

Related: Tech News Now: OpenAI says Musk contract 'never existed', Xiaomi's EV, and more

The company also plans to expand its research centre in Shanghai to support all of its product lines and open a new lab in southern tech hub Shenzhen later this year, according to the South China Morning Post.

Meanwhile, over in Europe, Apple announced changes to comply with the European Union's Digital Markets Act (DMA), which went into effect last week, Reuters reported on March 12.

Beginning this spring, software developers operating in Europe will be able to distribute apps to EU customers directly from their own websites instead of through the App Store.

"To reflect the DMA’s changes, users in the EU can install apps from alternative app marketplaces in iOS 17.4 and later," Apple said on its website, referring to the software platform that runs iPhones and iPads. 

"Users will be able to download an alternative marketplace app from the marketplace developer’s website," the company said.

Apple has also said it will appeal a $2 billion EU antitrust fine for thwarting competition from Spotify  (SPOT)  and other music streaming rivals via restrictions on the App Store.

The company's shares have suffered amid all this upheaval, but some analysts still see good things in Apple's future.

Bank of America Securities confirmed its positive stance on Apple, maintaining a buy rating with a steady price target of $225, according to Investing.com. 

The firm's analysis highlighted Apple's pricing strategy evolution since the introduction of the first iPhone in 2007, with initial prices set at $499 for the 4GB model and $599 for the 8GB model.

BofA said that Apple has consistently launched new iPhone models, including the Pro/Pro Max versions, to target the premium market. 

Analyst says Apple selloff 'overdone'

Concurrently, prices for previous models are typically reduced by about $100 with each new release. 

This strategy, coupled with installment plans from Apple and carriers, has contributed to the iPhone's installed base reaching a record 1.2 billion in 2023, the firm said.

More Tech Stocks:

Apple has effectively shifted its sales mix toward higher-value units despite experiencing slower unit sales, BofA said.

This trend is expected to persist and could help mitigate potential unit sales weaknesses, particularly in China. 

BofA also noted Apple's dominance in the high-end market, maintaining a market share of over 90% in the $1,000 and above price band for the past three years.

The firm also cited the anticipation of a multi-year iPhone cycle propelled by next-generation AI technology, robust services growth, and the potential for margin expansion.

On Monday, Evercore ISI analysts said they believed that the sell-off in the iPhone maker’s shares may be “overdone.”

The firm said that investors' growing preference for AI-focused stocks like Nvidia  (NVDA)  has led to a reallocation of funds away from Apple. 

In addition, Evercore said concerns over weakening demand in China, where Apple may be losing market share in the smartphone segment, have affected investor sentiment.

And then ongoing regulatory issues continue to have an impact on investor confidence in the world's second-biggest company.

“We think the sell-off is rather overdone, while we suspect there is strong valuation support at current levels to down 10%, there are three distinct drivers that could unlock upside on the stock from here – a) Cap allocation, b) AI inferencing, and c) Risk-off/defensive shift," the firm said in a research note.

Related: Veteran fund manager picks favorite stocks for 2024

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Major typhoid fever surveillance study in sub-Saharan Africa indicates need for the introduction of typhoid conjugate vaccines in endemic countries

There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high…

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There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.

Credit: IVI

There is a high burden of typhoid fever in sub-Saharan African countries, according to a new study published today in The Lancet Global Health. This high burden combined with the threat of typhoid strains resistant to antibiotic treatment calls for stronger prevention strategies, including the use and implementation of typhoid conjugate vaccines (TCVs) in endemic settings along with improvements in access to safe water, sanitation, and hygiene.

 

The findings from this 4-year study, the Severe Typhoid in Africa (SETA) program, offers new typhoid fever burden estimates from six countries: Burkina Faso, Democratic Republic of the Congo (DRC), Ethiopia, Ghana, Madagascar, and Nigeria, with four countries recording more than 100 cases for every 100,000 person-years of observation, which is considered a high burden. The highest incidence of typhoid was found in DRC with 315 cases per 100,000 people while children between 2-14 years of age were shown to be at highest risk across all 25 study sites.

 

There are an estimated 12.5 to 16.3 million cases of typhoid every year with 140,000 deaths. However, with generic symptoms such as fever, fatigue, and abdominal pain, and the need for blood culture sampling to make a definitive diagnosis, it is difficult for governments to capture the true burden of typhoid in their countries.

 

“Our goal through SETA was to address these gaps in typhoid disease burden data,” said lead author Dr. Florian Marks, Deputy Director General of the International Vaccine Institute (IVI). “Our estimates indicate that introduction of TCV in endemic settings would go to lengths in protecting communities, especially school-aged children, against this potentially deadly—but preventable—disease.”

 

In addition to disease incidence, this study also showed that the emergence of antimicrobial resistance (AMR) in Salmonella Typhi, the bacteria that causes typhoid fever, has led to more reliance beyond the traditional first line of antibiotic treatment. If left untreated, severe cases of the disease can lead to intestinal perforation and even death. This suggests that prevention through vaccination may play a critical role in not only protecting against typhoid fever but reducing the spread of drug-resistant strains of the bacteria.

 

There are two TCVs prequalified by the World Health Organization (WHO) and available through Gavi, the Vaccine Alliance. In February 2024, IVI and SK bioscience announced that a third TCV, SKYTyphoid™, also achieved WHO PQ, paving the way for public procurement and increasing the global supply.

 

Alongside the SETA disease burden study, IVI has been working with colleagues in three African countries to show the real-world impact of TCV vaccination. These studies include a cluster-randomized trial in Agogo, Ghana and two effectiveness studies following mass vaccination in Kisantu, DRC and Imerintsiatosika, Madagascar.

 

Dr. Birkneh Tilahun Tadesse, Associate Director General at IVI and Head of the Real-World Evidence Department, explains, “Through these vaccine effectiveness studies, we aim to show the full public health value of TCV in settings that are directly impacted by a high burden of typhoid fever.” He adds, “Our final objective of course is to eliminate typhoid or to at least reduce the burden to low incidence levels, and that’s what we are attempting in Fiji with an island-wide vaccination campaign.”

 

As more countries in typhoid endemic countries, namely in sub-Saharan Africa and South Asia, consider TCV in national immunization programs, these data will help inform evidence-based policy decisions around typhoid prevention and control.

 

###

 

About the International Vaccine Institute (IVI)
The International Vaccine Institute (IVI) is a non-profit international organization established in 1997 at the initiative of the United Nations Development Programme with a mission to discover, develop, and deliver safe, effective, and affordable vaccines for global health.

IVI’s current portfolio includes vaccines at all stages of pre-clinical and clinical development for infectious diseases that disproportionately affect low- and middle-income countries, such as cholera, typhoid, chikungunya, shigella, salmonella, schistosomiasis, hepatitis E, HPV, COVID-19, and more. IVI developed the world’s first low-cost oral cholera vaccine, pre-qualified by the World Health Organization (WHO) and developed a new-generation typhoid conjugate vaccine that is recently pre-qualified by WHO.

IVI is headquartered in Seoul, Republic of Korea with a Europe Regional Office in Sweden, a Country Office in Austria, and Collaborating Centers in Ghana, Ethiopia, and Madagascar. 39 countries and the WHO are members of IVI, and the governments of the Republic of Korea, Sweden, India, Finland, and Thailand provide state funding. For more information, please visit https://www.ivi.int.

 

CONTACT

Aerie Em, Global Communications & Advocacy Manager
+82 2 881 1386 | aerie.em@ivi.int

Journal

The Lancet Global Health

Method of Research

Observational study

Subject of Research

People

Article Title

Incidence of typhoid fever in Burkina Faso, Democratic Republic of the Congo, Ethiopia, Ghana, Madagascar, and Nigeria (the Severe Typhoid in Africa programme): a population-based study

Article Publication Date

12-Mar-2024

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US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever… And Debt Explodes

US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever… And Debt Explodes

Earlier today, CNBC’s…

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US Spent More Than Double What It Collected In February, As 2024 Deficit Is Second Highest Ever... And Debt Explodes

Earlier today, CNBC's Brian Sullivan took a horse dose of Red Pills when, about six months after our readers, he learned that the US is issuing $1 trillion in debt every 100 days, which prompted him to rage tweet, (or rageX, not sure what the proper term is here) the following:

We’ve added 60% to national debt since 2018. Germany - a country with major economic woes - added ‘just’ 32%.   

Maybe it will never matter.   Maybe MMT is real.   Maybe we just cancel or inflate it out. Maybe career real estate borrowers or career politicians aren’t the answer.

I have no idea.  Only time will tell.   But it’s going to be fascinating to watch it play out.

He is right: it will be fascinating, and the latest budget deficit data simply confirmed that the day of reckoning will come very soon, certainly sooner than the two years that One River's Eric Peters predicted this weekend for the coming "US debt sustainability crisis."

According to the US Treasury, in February, the US collected $271 billion in various tax receipts, and spent $567 billion, more than double what it collected.

The two charts below show the divergence in US tax receipts which have flatlined (on a trailing 6M basis) since the covid pandemic in 2020 (with occasional stimmy-driven surges)...

... and spending which is about 50% higher compared to where it was in 2020.

The end result is that in February, the budget deficit rose to $296.3 billion, up 12.9% from a year prior, and the second highest February deficit on record.

And the punchline: on a cumulative basis, the budget deficit in fiscal 2024 which began on October 1, 2023 is now $828 billion, the second largest cumulative deficit through February on record, surpassed only by the peak covid year of 2021.

But wait there's more: because in a world where the US is spending more than twice what it is collecting, the endgame is clear: debt collapse, and while it won't be tomorrow, or the week after, it is coming... and it's also why the US is now selling $1 trillion in debt every 100 days just to keep operating (and absorbing all those millions of illegal immigrants who will keep voting democrat to preserve the socialist system of the US, so beloved by the Soros clan).

And it gets even worse, because we are now in the ponzi finance stage of the Minsky cycle, with total interest on the debt annualizing well above $1 trillion, and rising every day

... having already surpassed total US defense spending and soon to surpass total health spending and, finally all social security spending, the largest spending category of all, which means that US debt will now rise exponentially higher until the inevitable moment when the US dollar loses its reserve status and it all comes crashing down.

We conclude with another observation by CNBC's Brian Sullivan, who quotes an email by a DC strategist...

.. which lays out the proposed Biden budget as follows:

The budget deficit will growth another $16 TRILLION over next 10 years. Thats *with* the proposed massive tax hikes.

Without them the deficit will grow $19 trillion.

That's why you will hear the "deficit is being reduced by $3 trillion" over the decade.

No family budget or business could exist with this kind of math.

Of course, in the long run, neither can the US... and since neither party will ever cut the spending which everyone by now is so addicted to, the best anyone can do is start planning for the endgame.

Tyler Durden Tue, 03/12/2024 - 18:40

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