S&P 500 earnings update
S&P 500 earnings per share (EPS) declined from $206.77 to $206.75 last week. A very modest decline, but it had been 22 straight weeks of EPS increases. The forward EPS is +30.02% year-to-date.
99.4% of companies have now reported Q2 results. 88% have beaten estimates and results have come in a combined +15.8% above expectations. Q2 EPS growth rate is now +95.6%. (I/B/E/S data from Refinitiv)
The S&P 500 index increased +0.58% this past week, for yet another record close.
S&P 500 price to earnings (PE) ratio increased to 21.9.
S&P 500 earnings yield is now 4.56%, compared to the rate of 1.32%.
Economic data review
declined in August, coming in at 113.8 (down -9% for the month, but +31.9% over the last 12 months), which was well below expectations. July was revised lower as well, from 129.1 to 125.1.
“Consumer confidence retreated in August to its lowest level since February 2021 (95.2). Concerns about the Delta variant—and, to a lesser degree, rising gas and food prices—resulted in a less favorable view of current economic conditions and short-term growth prospects.
“Spending intentions for homes, autos, and major appliances all cooled somewhat; however, the percentage of consumers intending to take a vacation in the next six months continued to climb. While the resurgence of COVID-19 and inflation concerns have dampened confidence, it is too soon to conclude this decline will result in consumers significantly curtailing their spending in the months ahead.”
17.8% expect business conditions to worsen in the next 6 months (up from 11.9% last month), while 22.9% expect business conditions to improve in the next 6 months (down from 30.9%). The short term labor market outlook deteriorated slightly, while short term financial prospects showed a modest decline as well.
(PMI) for August came in at 59.9, the 15th consecutive month in expansion territory. All 6 of the biggest manufacturing industries registered moderate to strong growth for the month.
“Manufacturing performed well for the 15th straight month, with demand, consumption and inputs registering month-over-month growth, in spite of unprecedented obstacles. Panelists’ companies and their supply chains continue to struggle to respond to strong demand due to difficulties in hiring and a clear cycle of labor turnover as workers opt for more attractive job conditions.
“Disruptions from COVID-19, primarily in Southeast Asia, are having dramatic impacts on many industry sectors. Ports congestion in China continues to be a headwind as transportation networks remain stressed. Demand remains at strong levels, despite increased prices for nearly everything.”
increased +1.8% to 66.7%.
While input costs actually declined 6.3% to 79.4%. Which means costs are still increasing, but at a slower pace. But its the first monthly reading below 80% since December 2020.
ISM (PMI) for August came in at 61.7, the 15th straight month in expansion territory.
“According to the Services PMI®, 17 services industries reported growth. The composite index indicated growth for the 15th consecutive month after a two-month contraction in April and May 2020. There was a pullback in the rate of expansion in the month of August; however, growth remains strong for the services sector. The tight labor market, materials shortages, inflation and logistics issues continue to cause capacity constraints.”
New orders came in at 63.2, down from 63.7 last month, but still well in growth territory.
Prices (or input costs) continue to rise, but the pace of the advance is moderating. The prices index came in at 75.4, down from 82.3 last month.
The missed expectations, with a net gain of +235K jobs in August (street was expecting around 720K). There were some bright spots, net job gains for June were revised higher (from +938K to +962K), and July was revised higher as well (from +943K to +1,053K), for a net of +134K job gains higher than previously reported. Total private payrolls increased +243K.
We have now recovered 76.4% of the job losses due to COVID, but still remain a net 5.333 million jobs below the pre-COVID peak. Monthly job gains have averaged +586K this year. If this pace were to continue, a full jobs recovery would occur in a little over 9 months (May 2022).
Wage inflation was evident. +0.6% for the month (from $30.56 to $30.73). More on this in the summary section.
Notable earnings
DocuSign (NASDAQ:) reported another with adjusted EPS coming in at $0.47, +18% above expectations and +176% growth.
Quarterly revenue came in +5% above expectations, for a +50% growth rate. Subscription revenue grew 52%. The company has now reported $2.137 billion in sales over the last 4 quarters (TTM). They projected around 40% sales growth next quarter, 45% sales growth for the full fiscal year.
Gross margins increased from 74% to 78% for the quarter, while operating margins improved from -17.1% to -4%. TTM operating margins are now -7.7%, which is the best its been since going public. It looks like DocuSign is on its way to becoming GAAP profitable next year.
Free cash flow grew +62% for the quarter, led by a +50% gain in operating cash flow. The company has now reported almost $500 million in free cash flow over the last 4 quarters.
Strong results plus forward guidance well above expectations. This report checked all the boxes. The strength in international sales was most impressive (+71% growth, now 22% of total revenue). Also the company’s customer count now exceeds 1 million. I don’t see this as just a “COVID” stock. People want convenience and DocuSign provides that.
The stock may have broken out from a year trading range. At 33x sales and 137x cash flow, the stock is not cheap by any means. However, I actually added to the position after earnings results with the understanding the stock could fall back within the prior trading range.
Chart of the week
Historic Q2 earnings growth is a global phenomenon. In the US, Q2 earnings growth is now coming in at +95%. But in other parts of the world, earnings are growing even faster. The above chart shows the Q2 growth rate for the , which is the index for Europe, coming in at +248%.
Foreign stocks have lagged US stocks for a long time, but for investors with extra cash and worried about US stock valuations, foreign stocks may be a good place to turn. They could very well continue to lag US stocks, but they currently offer higher dividend yields and lower PE ratios.
Summary
No problems on the earnings side. Companies continue to report stellar results, and beat market expectations. The economic data was mixed, with the ISM Services & Manufacturing continuing to show the economy is bouncing back strong despite the supply chain issues.
While the consumer confidence and jobs report shows signs that economic growth could moderate a bit more than expected, it’s still too soon to tell. And as I’ve highlighted numerous times, it’s against the backdrop of strong earnings, record low interest rates, and fiscal/monetary stimulus.
In regards to the BLS labor report, market participants are going to look through the report and speculate on the Fed’s next move. The Fed is in a bind, the net job gains were well below expectations (which could give them room to delay “tapering” plans), but the wage inflation was clear.
IMO, they really should start reducing their bond buying program ASAP. It’s low hanging fruit. Yes the market could have a short term negative reaction, but they will get over it. Interest rates will still be at 0%. They really don’t want to risk getting behind this. Inflation could be transitory, but so far there is little to no data that shows a return to normalized inflation rates. The FOMC event in a few weeks will be important. Not just for the statement, but for the updated projections on interest rates and the economy.
Next week: A holiday shortened week. Only 2 S&P 500 companies reporting earnings. For economic data we have the (PPI) on Friday.