CWS Market Review – October 22, 2024

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Q2 Earnings Are Looking Good (Mostly)

Q2 earnings season is in full swing. This week, 112 members of the S&P 500 and seven of the 30 stocks in the Dow are due to report earnings. The early numbers look mostly good. The good news is that more companies are beating earnings, but they’re doing it by smaller amounts.

This looks to be the fifth quarter in a row of earnings growth, but it will be the slowest growth in the last year.

The stock market doesn’t seem terribly concerned. The S&P 500 is down a bit since its last all-time high close reached on Friday.

The stock market has had a very impressive run since the last low reached in early August. The index is currently more than 3% above its 50-day moving average.

So far, 14% of the companies in the S&P 500 have reported earnings results. Of those, 79% have beaten expectations. That’s a little above the usual rate. (Yes, on Wall Street, you’re expected to beat expectations.)

Companies are reporting results that are 6.1% above expectations. That’s lower than normal. Over the last five years, companies have topped results by 8.5%.

Digging into the details, we’ve seen decent results from many large banks, but the weak spot is that we’ve seen lower guidance from industrials.

Some of these numbers for expectations have been helped by analysts cutting back on their forecasts. Earnings growth is now tracking at 3.4%, but that’s down from 4.3% at the end of Q3.

Of the companies that have reported so far, 64% have beaten on revenue which is a little below the five-year average of 69%. On average, companies are beating on revenue by 1.1%. That’s below the five-year average of 2%.

If 4.7% is the actual revenue growth rate for the quarter, it will mark the 16th quarter in a row of positive revenue growth.

The “Magnificent 7” stocks are expected to report earnings growth of 18.1% for Q3. If you took those seven out of the S&P 500, then the other 493 stocks are expected to report earnings growth of 0.1%.

For this calendar year, analysts expect earnings growth of 9.4%. They see that ramping up to 15.1% for next year. I expect to see both numbers gradually lowered. The forward price/earnings ratio is currently 21.9 which is elevated but not extreme.

Moody’s Posts a Big Earnings Beat

Seven of our Buy List stocks are due to report this week. We already had three reports out earlier today. I’ll go over all of them in our premium issue, but I wanted to highlight one of them for today’s issue.

For Q3, Moody’s (MCO) said that its adjusted earnings rose 32% to $3.21 per share. Wall Street had been expecting $2.86 per share. The CFO said this was a “fantastic” quarter for Moody’s and I agree.

Moody’s also raised its full year guidance to a range of $11.90 to $12.10 per share. The previous range was $11 to $11.40 per share. Since Moody’s has already made $9.85 per share so far this year, the new guidance implies Q4 earnings of $2.05 to $2.25 per share. Wall Street had been expecting $2.18 per share.

CEO Rob Fauber said:

“Moody’s record-breaking revenue performance in the third quarter is a testament to our unwavering status as the Agency of Choice for our customers and our actions to prime the business for durable future growth. In parallel, we delivered strong recurring revenue growth in our analytics business, driven by investments and innovation that enhance our offerings and empower our customers with the insights necessary to navigate the complexities of an increasingly dynamic risk environment.”

The stock fell after the earnings report, but I’m not at all concerned. It’s not unusual for our stocks to drop after their earnings reports. The company continues to do very well. Over the last two years, shares of Moody’s have doubled for us, and that includes some big drops.

This week will be dominated by earnings news. There’s not much going on as far as economic reports. Several Fed officials will be speaking but that’s usually not so important for economic news.

Next week, however, will see some important news. The October jobs report will be out next Friday, November 1. If you recall, the jobs numbers for September were quite good. The U.S. economy created 254,000 net new jobs last month.

The other report to look out for is the first report on Q3 GDP. Of course, this report will be revised many times, but next Wednesday we’ll see the government’s first stab at it. Growth for Q2 was 3.0%. The Atlanta FED’s GDPNow model sees Q3 growth of 3.4%. That would be very impressive.

If the economy is doing better than expected, then we can see possible evidence in other places. For example, the yield on the 10-year Treasury has slowly crept higher. On October 1, the 10-year yield was 3.74%. By Monday’s close, it had risen by 45 basis points.

Tied to the higher bond yields is that growth stocks have been outperforming value stocks over the last few weeks. It’s not by a huge amount but the value/growth divide often mimics what Treasury bonds are doing.

Stock Focus: MarketAxess

Lately, I’ve been watching shares of MarketAxess (MKTX). This is a good example of a company that’s fairly large but not well known outside the world of financial data.

The company runs an electronic trading platform for the institutional credit markets. In other words, this is how the big boys trade bonds, and MarketAxess dominates the field. In electronic trading, 85% of bonds are traded on MKTX’s platform, as are 84% of junk bonds. That works out to 20% of all corporate bond trading in the U.S.

The company was started by Richard McVey in 2000, and he served as CEO until last year. The stock IPO’d in 2004 at $11 per share and it was a huge success. By 2020, MKTX got to $600 per share. Then it started to struggle. Earlier this year, the stock dropped below $200 per share.

Is there a potential bargain here? Possibly. MKTX dominates its business, and the company continues to be profitable, although it’s not seeing much growth in recent years. The business was impacted last year by lower corporate bond issuance.

The stock is suddenly popular again. In August, MKTX reported Q2 earnings of $1.72 per share. That was a four-cent beat. Last week, the stock briefly broke above $300 per share. That’s a huge turnaround for a short period of time.

MarketAxess is due to report earnings again on November 6. Wall Street is looking for earnings of $1.85 per share. The stock is hardly cheap. It’s currently going for about 35 times next year’s earnings. At a lower price, it could be worth buying.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

Posted by on October 22nd, 2024 at 2:19 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.