Exploring Wall Street Estimate Changes, Non-Farm Isn't Boring For Once, and Much More
Exploring Wall Street Estimate Changes, Non-Farm Isn't Boring For Once, and Much More
StreetSmarts Morning Newsletter
"The big money is not in the buying and selling... but in the waiting."
-Charlie Munger
"October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."
-Mark Twain
Table of Contents
A.M. Allocations: Summaries of important news and investing events
US Employment Data Out Today
MGM Resorts Expects $100 Million Hit From Cyber Attack
Elon Musk Sued By SEC To Force Twitter Testimony
AMD Price Target Slashed
Hot Headlines: Links to some of the top financial stories of the day
[Cover Story] Wall Street Estimate Revisions: Do Stocks Deserve To Be Up?
A.M. Allocations
US Employment Data Out Today - The September payroll report, courtesy of the Labor Department, is anticipated to reflect a 170,000 increase in hiring, lowering unemployment to 3.7%. However, this positive note is still a subdued echo compared to the 187,000 gain witnessed in August. Amidst this, the Federal Reserve - with its arsenal of 11 interest rate hikes - remains vigilant, its gaze unwavering against the backdrop of an inflation rate that overshoots the 2% target. The anticipated uptick in government hiring, spurred by the return of the school season, is expected to bring a semblance of balance to the unfolding narrative.
Take-Aways: Payrolls (technically ‘Non-Farm Payrolls’, or ‘Non-Farm’ if you’re hip) is usually a big deal but this one is really big. Future Fed interest rate increases are premised upon a healthy economic back-drop to absorb the impact. A weak jobs number could cast future hikes in doubt - and throw the market into a tizzy.
MGM Resorts Expects $100 Million Hit From Cyber Attack - Q3 earnings are following a cyberattack, attributed to hacking group AlphV, which breached customer data and disrupted operations. Although the attack underscores the persistent vulnerability of large organizations to cyber threats (Caesars Entertainment and Clorox were also hacked in September), no evidence has been found of the compromised data being misused.
Take-Aways: Large scale hacks seem to be everywhere these days and are starting to have an impact on the broader economy (Clorox hack led to a cleaning supplies shortage; my friend Marina was none too pleased). I’m guessing we are going to see more involved government action to target these groups. (Just an opinion, please don’t hack me).
Elon Musk Sued By SEC To Force Twitter Testimony - The SEC is attempting to compel his testimony in a probe related to his $44 billion acquisition of Twitter, a situation that adds to the already complex relationship between the regulator and the billionaire entrepreneur. The SEC is examining whether Musk violated federal securities laws during the acquisition and his subsequent statements. Despite Musk’s avoidance of scheduled appearances and his claim of harassment by the SEC, the regulatory body remains persistent.
Take-Aways: Musk has played with fire before and lost (that ‘take Tesla private at $420’ Tweet cost him $20 million and the Chairmanship of Tesla), so you’d think he’d learn to play ball…but, then that wouldn’t make him Elon.
***Also: I’m almost done the new Isaacson book on Musk and I’m really enjoying it***
AMD Price Target Slashed - Baird Equity Research has reduced its price target for AMD stock to $125 from $170, citing a delayed adoption of the company's AI chips. The analyst, Tristan Gerra, notes that AMD is lagging behind Nvidia, primarily due to an underdeveloped AI software tools ecosystem and developer support.
Take-Aways: In the world of AI, it seems AMD is bringing a knife to a gunfight, with Nvidia’s artillery of tools and developer support leading the charge. It's like AMD missed the memo where software ecosystems are the secret sauce to AI’s main course.
Joke Of The Day
How many consultants does it take to change a light bulb?
“I’ll have an estimate for you next week.”
An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today. And do you know who is a stock market expert? Someone who will make a list of those things!
Hot Headlines
(CNBC) - GM’s stock hits three-year low amid UAW strike, potential air bag recall
(CNBC) - Taylor Swift’s Eras Tour concert film surpasses $100 million in ticket sales
(Reuters) - Canada's grocery chains pledge to help cut food prices, government says
(CNN) - Ongoing planning underway for potential Biden and Xi meeting in San Francisco in November, sources say
(Reuters) - US curbs on chip tools to China nearly finalized, government posting shows
(MarketWatch) - BlackBerry stock rises on announcement of planned IPO of its IoT business
(Bloomberg) - America’s Factory Boom Brings Billion-Dollar Projects to Tiny Towns
(MarketWatch) - Rivian shares sink after preliminary sales estimates; plan to offer $1.5 billion in convertible notes
Trivia
What event took place on October 29, 1929 and was one of the triggers for the Great Depression?
Black Tuesday
Black Monday
Blue Monday
Red Friday
Who was known as the "Man Who Broke the Bank of England"?
Benjamin Graham
John Maynard Keynes
George Soros
Jesse Livermore
(answers at bottom)
Wall Street Estimate Revisions
Do Stocks Deserve To Be Up?
In this newsletter I’ve regularly poked fun at the S&P 500 as being carried along by the strength of its largest companies. In fact, my write-up on Wednesday went as far as to call the Index ‘Top Heavy’, where the returns from the 10 biggest companies have contributed more than 100% of the S&P’s annual return (currently sitting at around 11% and above the 10% historical average). Today I wanted to take another look at the Index but from a different angle: How much have Wall Street estimates for companies changed over the course of the year? In essence, I wanted to see how much the rally this year was driven by hype and how much driven by actual improvement in operating fundamentals. Let’s check it out…
To start, I was pretty skeptical. As you can see above, while Wall Street estimates for US GDP in 2023 ended up proving more resilient than expected, the outlook for 2024 has steadily pointed towards recession. That’s usually not super good for companies.
Despite a somber outlook for the economy in 2024, you can see in the above that Wall Street estimates for the biggest S&P 500 companies have actually improved considerably. Looking at estimates for revenue for the next fiscal year (in finance speak: FY2), in many cases the increase in price has outweighed the increase in forecasted revenue. In addition, nearly all the biggest companies saw some improvement over the course of the year in their outlook (but note: Exxon’s declined since they’re probably most economically sensitive to the slowing economy; and Apple dropped, well, cuz the new iPhone kinda sucked).
Looking at those companies from a forecasted Earnings Per Share perspective, the story is even more compelling. And look, I’ll be honest, I was laughing at the horde of momentum traders buying Nvidia into the stratosphere, but if the Street is even remotely correct on their EPS forecast, that now TRILLION dollar company tripled this year…and their FY2 Price to Earning ratio actually went down (!!!). Recall - a high P/E ratio usually indicates a stock is expensive, while a low ratio signals it is “cheap.”
The change in tides for Meta is also pretty interesting. In 2021 and 2022, they were the dog of the FAANG stocks (yes, two of the companies have changed their names - but I still like it, ok?). They bet the farm on the disappointing ‘metaverse’ - hiring tens of thousands of people and spending billions - and in the end only had 38 active users. By pivoting away from that and streamlining the business (ie: firing 21,000 employees) they significantly reigned in costs and their shares have been on a rebound ever since. It’s almost like investors don’t like it when you set money on fire.
But it doesn’t just stop with the big names. Across the whole of the S&P 500 there is a noticeable trend of improving EPS estimates over the course of the year. So assuming the Wall Street guys and gals are fairly accurate - and that’s a big caveat - the general health of companies has improved over the course of the year, and potentially the health of the stock market remains intact.
Opinion: Wall Street research analysts are pretty good at their jobs. I mean, some like to drink, insider trade, and some are there because their dad was in the same frat as the Managing Director. The important thing to note is that even though these are forward estimates, the data is ‘backward looking’ - meaning that those estimates are susceptible to move downward just as fast (and often much faster) than they went up. If you are like me and have growing concerns about the market going into next year, then be prepared for share prices to lead estimates on the way down (they almost always do). The only real question to ask, is will Zuck change the name back?
Market Update
Trivia Answers
Black Tuesday. Panicked sellers traded nearly 16 million shares on the New York Stock Exchange (NYSE), causing stock prices to collapse and leading to the Great Depression. It marked the end of the Roaring Twenties, a decade of wealth and excess, and initiated a worldwide economic crisis that lasted for ten years.
George Soros. George Soros is a renowned Hungarian-American investor, business magnate, and philanthropist, famously known as "The Man Who Broke the Bank of England" after he made a significant profit by short selling the British pound sterling in 1992. This event occurred on Black Wednesday, when the UK government was forced to withdraw the pound from the European Exchange Rate Mechanism, leading to a devaluation of the currency and earning Soros over a billion dollars in profit.
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