Reporting season in the US is well underway and the early signs are encouraging.
The US reporting season has now begun in earnest and the early signs are largely encouraging.
US banks' results were for the most part positive – although Net Interest Margins remain a challenge given the low interest rate backdrop. Overall, an estimated 15% of the S&P500 has reported so far, with earnings coming in around 5% higher, ahead of consensus and above the historical average of approximately up 3.5%.
In terms of technology stocks, which have had a strong 2019 to say the least, we have already seen evidence of differing fortunes from a couple of the larger names in the form of Netflix (NASDAQ:NFLX) and Microsoft (NASDAQ:MSFT).
In a relatively short time, Netflix has become a household name. The ability to stream and watch drama series or movies at a time convenient to the consumer holds great appeal.
The company's expansion overseas has been rapid, with revenues now split almost evenly between the US and international. But there is a growing threat from rival streaming services, particularly entertainment giant Walt Disney (NYSE:DIS), which launches its own version Disney Plus in November, and also of course Apple TV+.
For investors, valuing a high-growth stock is never easy. Netflix does now generate a profit, offering a firmer basis on which to try and value its shares. It currently sits on a one-year prospective price/earnings (PE) ratio of over 90 against a three-year average of over 160, suggesting the removal of some early enthusiasm. Although not directly comparable, Disney sits on a one-year prospective PE ratio of under 25.
Seemingly having previously lost its way with Windows phone software, Microsoft has now revived its fortunes. The arrival of the current chief executive in 2014 has had a galvanising effect, providing renewed clarity of purpose, with its move to build on its cloud server business paying off handsomely. Enthusiasm for the shares this year had already revived Microsoft's share price, too, and these numbers have propelled it to top of the US stock market's biggest companies, now worth over $1 trillion, more than Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN).
For investors, Microsoft shares have regained their former growth tag, evidenced by a current forward price/earnings (PE) ratio of just under 30, which is about 10 points above its 10-year average. Shareholder returns, and eight consecutive years of dividend growth should also not be forgotten, although dividend income is not necessarily the reason why one would buy Microsoft.
This well-run tech company gives investors exposure to parts of the economy and industry catalysts that are difficult to find elsewhere. For many investors it remains a must-own stock.
Such differing fortunes give a fascinating insight as to where this sector currently finds itself. Matters will broaden out considerably as we begin to see numbers from other vital industries as well.
Indeed, after the next couple of weeks, a very much clearer picture will emerge as the majority of companies will have reported. This week alone, we are expecting updates from the likes of Facebook (NASDAQ:FB), Boeing (NYSE:BA), Tesla (NASDAQ:TSLA), Ford (NYSE:F), Amazon, Google (NASDAQ:GOOGL) (in the form of Alphabet), Starbucks (NASDAQ:SBUX), McDonald's (NYSE:MCD) and Twitter (NYSE:TWTR).
It will also likely show whether the trade tensions with China are beginning to have a real and measurable impact on US companies, as evidenced from the canaries in the coalmine so far of the likes of Apple and General Motors (NYSE:GM).
The expectations bar is also being set increasingly high in light of the indices' performances in the year to date – the Dow Jones is up 16%, the S&P500 has added 19% and the Nasdaq 23%.
With the Federal Reserve meeting also taking place over 30th/31st July, and an interest rate cut largely expected, the summer month of July could prove pivotal in deciding the direction of the US markets for the remainder of the year.
This material is intended for educational purposes only and is not investment research or a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments can rise as well as fall, and you could get back less than you invested. The investments referred to may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. Past performance is not a guide to future performance.
Interactive Investor Services Limited is authorised and regulated by the Financial Conduct Authority.