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The Dow at 24,000, Tax Reform, the S&P Trading at 20x Expected Earnings: Is the Market Priced to Perfection?


The Dow at 24,000, Tax Reform, the S&P Trading at 20x Expected Earnings: Is the Market Priced to Perfection?

Last week we closed the books on November and turned the calendar to December, thereby kicking off the seasonal race to the holidays and closing out the year. For November, all the major market indices closed up between 2.2%-3.8%, with the highest being the Dow Jones Industrial Average and the lowest the Nasdaq Composite Index. This continued the market’s winning streak, but as we shared in Friday’s Weekly Wrap reasons to be concerned remain. What those percentage moves don’t reveal is the Dow broke the 24,000 barrier, as investors warmed to prospects for tax reform and the S&P 500 is trading at more than 20x expected 2017 earnings. Priced to perfection is what we would call it.

As we saw on Friday, however, tax reform is not a done deal in the Senate just yet, and the next few weeks will be filled with not only holiday cheer but also a meeting of the minds between the House and Senate tax bills. We remain cautiously optimistic, but once again the devil will be in the details. As we look for those, we also will be assessing prospects for a government shutdown on December 8th that House leaders are looking to avert with a measure to extend current funding until December 22nd. Amid all of that, here’ what we’ll be focused on this week. 

On the Economic Front

Last week saw some different GDP revisions, which in our view were a mixed bag. While the figure for 3Q 2017 was bumped up to 3.3% from 3.0%, not a bad thing but one that firmly sits in the rearview mirror, expectations for the current quarter slipped. Following weaker than expected October spending and consumption data, economists public and private slashed 4Q 2017 GDP expectations. While the ever up beat Atlanta Fed GDP Now survey fell to 2.7% from 3.4% the prior week, JPMorgan slashed its forecast to 2.5% from 3.0%.

Here’s the thing, with last week’s closing of the November books, we’ve started to get the month’s economic data and that will shape and re-shape GDP forecasts for the current quarter. There is a timing factor as well because the November Employment Report will be published this coming Friday following October Factory Orders data and November ISM Services figures. Given the lag in reported data, this is par for the course, and like most jigsaw puzzles, as time goes by and more pieces are in place, we’ll have a clearer view on what we’re looking at for the current quarter.

From time to time we are asked why we emphasize the monthly economic data, and the answer is simple — it’s one of the basic building blocks for our thematic approach. It also helps us determine if revenue and earnings expectations are reasonable, conservative or outright exuberant. For example, for the current quarter consensus expectations are calling for the S&P 500 group of companies to deliver EPS growth of 10% and revenue growth of 6.3%. The data to be had will help put some perspective and context around how feasible that forecast is. And it’s important given the market’s current valuation and investor sentiment. As Lenore Hawkins, Tematica’s Chief Macro Strategist, pointed out in Friday’s Weekly Wrap, investor bullishness is exceedingly high and to us, that means a modest miss of an earnings report relative to expectations could hit a market that has modest institutional investor cash sitting on the sidelines. As always, we keep one eye on upside to be had, with the other assessing potential downside risks. That’s how we roll here at Tematica.

On the Earnings Front

With the closing of the market’s November performance last week, it means a several week respite is to be had until companies report their current quarter results. Of course, there will be a number of “funny fiscal” stragglers, including a number of retailers.

Following last week’s 2017 holiday shopping bonanza that Tematica’s Chief Macro Strategist, Lenore Hawkins, and I discussed at length on last week’s Cocktail Investing Podcast, we’ll get quarterly results this week from Restoration Hardware (RH), American Eagle (AEO), LuLuLemon Athletica (LULU), Land’s End (LE) and Dollar General (DG). As we digest those commentaries, we’ll be focusing on whether they embraced the digital shopping aspect of our Connected Society investing theme this holiday season.

Our gut is that most have not given mounting data that has led GBH Insights to forecast Amazon will account for “roughly half of all e-commerce holiday sales made in the United States this year.”

While Amazon didn’t exactly share how it fared on Cyber Monday 2017, it did report it was its single biggest shopping day in company history, surpassing Prime Day 2017, which, per reports from Cowen & Co. and JPMorgan Chase & Co. clocked in around $1 billion in sales. Again, we’ll be reviewing upcoming retailer results, but there is little question that Amazon shares will remain on the Tematica Investing Select List well into 2018 as shoppers continue to migrate their spending dollars to online and mobile platforms.

Outside of retail earnings this week, we’ll also be hearing from Amazon-Whole Foods supplier and Food with Integrity investing theme candidate United Natural Foods (UNFI) and Safety & Security company American Outdoor Brands (AOBC), which was once known as Smith & Wesson. We’ll be tracking the former to see if mainstream grocers are dedicating more shelf space to food that is good for you, and the later to confirm the data that gun sales were one of the bigger winners over the Thanksgiving to Cyber Monday shopping spree this year.

As we’ve shared before, when the velocity of earnings season drops, we tend to have a spike in investment conferences and cribbing a line from The Wizard of Oz, “in the vernacular of the peasantry” this week is a doozy. We’ve whittled the list down from the nearly 30 events to be had this week across the globe to just over a handful that are poised to be the most market moving of the bunch:

  • Gartner IT Infrastructure, Operations Management & Data Center Conference
  • KeyBanc Capital Markets Consumer Conference
  • Raymond James Technology Investors Conference
  • Citi Global Healthcare Conference
  • Wells Fargo Investment Thought Leadership Forum
  • JPMorgan Global Outlook Conference

The coming week also brings a few analyst meetings, events where companies trot out the management team and share their latest views on where their industries and businesses are headed. Usually, these tend to be “drink the cool aid” type events, but every now and again a sobering view on the state of things is shared. With that in mind, we’ll be streaming Fitbit’s (FIT) analyst meeting later this week to see how it sees the wearables competitive landscape and how it responds to Apple’s (AAPL) new Apple Watch that includes LTE connectivity. Home Depot (HD) will also hold its analyst meeting this week, and one item we’ll be curious to hear about is efforts to grow its digital business as Amazon quietly encroaches on several of its store aisles.

Thematic Signals

Each week we look for data points pertaining to our 17 investment themes, or as we call them Thematic Signals. These signals can be confirming or they can serve to raise questions as to whether a theme’s tailwinds are strengthening or ebbing. Be sure to check out the Thematic Signals section of our website to read more about these stories and others we publish throughout the week. Here are some of the highlights we saw this week:

Connected Society, Content is King

Business flock to Instagram

The adoption of social media by companies to reach customers, share its wares, drive revenues and build its brands continues. Amid the battle between Facebook and LinkedIn, we are seeing businesses embrace Instagram, in some cases as its only web presence, to reach customers. Even as we peruse Instagram, we are seeing more companies have profiles as well as advertise. The visual nature of the platform, in our view, gives it a hefty leg up over Twitter and because the images “last” we say the same holds compared to Snap. Instagram is also a mobile-first platform, which means its appealing to smartphone users, the fastest growing category for digital commerce so far this holiday season. How long until the Facebook bears begin to wonder if Instagram’s success will eat into demand for Facebook? Read More >>

Affordable Luxury, Cash-Strapped Consumer

Subscription service comes to Volvo’s cars, but how serious is it?

2017 has been a year for subscription services ranging from razor blades, underwear, bacon and smartphones. Now we’re seeing it expand into upper-end cars with Volvo. While this is an interesting twist and includes insurance as well as maintenance, the monthly price point boxes out those in our Cash-Strapped Consumer and most in the Rise of our Rise & Fall of the Middle Class investing theme as well leaving potential users to our Affordable Luxury theme.

Much like the need for Tesla to bring a mid-tier price point car to market to drive volume and achieve related synergies, the move that will signal how serious Volvo’s subscription efforts are will be if it too moves down to its mid-tier vehicles. Something to watch as the round of annual auto shows commence. Read More >>

Cashless Consumption, Disruptive Technologies

Amazon adds payments to Alexa skill sets

Over the last year, we’ve seen considerable progress in the use of voice interface technology, due in part to the success of Amazon’s (AMZN) Alexa, but also efforts by Alphabet and to a lesser extent Apple. Like most Disruptive Technologies, we are seeing the use cases continue to expand and ripple across our Cashless Consumption investing theme. Not surprising given Amazon’s efforts into voice-driven shopping as well as its online and mobile payments initiative known as Amazon Pay. Read More >>


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