Companies did better than expected in Q3, but every investor must watch this canary in the coalmine.
Admittedly, against expectations, which had been marked down, the US third-quarter earnings season exceeded estimates.
That being said, Wall Street remains in the middle of an earnings recession, while fourth-quarter estimates have also fallen sharply. Looking out to 2020, the picture is hazy with no immediate or obvious additional catalysts coming from the Federal Reserve.
The Fed seems content with the action it has taken in the year to date, and so does not seem willing to inject any further adrenalin into the system at this juncture. Meanwhile, the health and confidence of the consumer will remain key, with investors keeping a sharp eye out for any change in behaviour. With this in mind, discretionary consumer spend will be the canary in the coalmine for any deterioration.
Even so, generally well-received Q3 numbers, along with sporadic progress in the trade talks between the US and China and a heavy technology influence on the index, have all combined to power the S&P500 to record highs.
Indeed, on the face of it, the US markets have had a punchy 2019.
The Dow Jones Industrial Average is up 19% in the year to date, the S&P500 has added 23% and the Nasdaq 28%. Over the last year, however, progress has been less stratospheric with the Dow having added 9%, the S&P500 13% and the Nasdaq 14%.
Fuelled by the success of its Lion King remake and Toy Story 4, along with lower-than-expected expenses for its new Disney+ streaming service, adjusted earnings of $1.07 per share beat forecasts of just below a dollar.
Sales for its Studio Entertainment division jumped by 52% to $3.31 billion. Costs in relation to the launch of Disney+ contributed to a 5% decline in full-year profitability to $14.87 billion.
Internet streaming service Disney+ will initially broadcast in the US, Canada and the Netherlands, with a further rollout to Europe later next year. This launch, along with the acquisition of further content from Fox is what currently excites investors.
Facebook has come under intense government scrutiny given concerns for data privacy, but reported a 9% jump in daily active users to 1.62 billion and an 8% improvement in monthly active users to 2.45 billion. Adding in users of its other apps such as Instagram, WhatsApp, and Messenger, the monthly users figure rises to 2.8 billion.
Mobile advertising now accounts for approximately 94% of advertising revenue, up from around 92% in the prior year quarter.
From an investment perspective, a significant cash holding and a forward price/earnings ratio of 23 and below the three-year average of 30.1 offer some attraction. Facebook is a significant business offering exposure to a segment of the global economy that you cannot get access to elsewhere. Of course, a 40%-plus gain in the share price since the start of the year does provide for some caution, and the argument over tech sector valuations rumbles on.
Apple's revenue of $64 billion topped analyst estimates driven by a move to increase its diversity of sales away from its famed iPhone. Services sales grew by 18%, Wearables and Accessories such as its watches increased by 54% and iPad sales were up 17%. iPhone sales declined by 5%.
The group, whose new streaming service Apple TV+ is now live, predicted first-quarter Christmas holiday sales of between $85.5 billion and $89.5 billion, potentially ahead of analyst estimates of around $87 billion. Reductions in the price of its latest iPhone 11 range may well contribute.
The trade war between the US and China, a key market place, is also unhelpful. More favourably, the group's cash balance and recent change towards funnelling capital back to shareholders offers a positive.
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