As the third quarter earnings season begins next week, 112 companies in the S&P 500 have issued earnings guidance, with half (50%) issuing positive earnings guidance and half issuing negative earnings guidance: Companies Issuing EPS Guidance for Q3 | FactSet
This may seem like a flip of a coin for where earnings will end up, but 50% of companies reporting positive guidance is above the 5- and 10-year averages of 43% and 39%, respectively, and is the highest percentage since 2021. The number of companies issuing negative guidance is below the 5- and 10-year averages as well. The technology sector is leading the way both in terms of the number of companies (36) issuing positive guidance and earnings growth rate (+20.9%).
Technology companies continue to announce spending and deals with each other around artificial intelligence (AI) buildout, and some have pointed to worrying signs that AI may not offer the returns necessary to offset the spending, particularly as companies issue debt to pay for the expenditures: Spending on AI Is at Epic Levels. Will It Ever Pay Off? | WSJ
The other side of this is that technology companies are growing earnings faster than other sectors in the S&P 500 and have been rewarded for it with high stock prices. Goldman Sachs feels that the S&P 500 price to earnings ratio of 22x, while above the historical average of 19x, may be appropriate. This is in part due to the recent growth in earnings of 11% over the past three years, compared to the historic average of 9%: Weekly Market Monitor | Goldman Sachs Asset Management. Goldman even suggests technology may be trading at a slight discount versus long-term averages compared to the rest of the S&P 500: Tech Pulse Check | Goldman Sachs Asset Management
Proposed Change to Quarterly Reporting: Quarterly earnings are currently required by the Securities and Exchange Commission (SEC) but may shift to semi-annual earnings with proposed regulatory changes by President Trump. This is a thoughtful review of the implications, from reducing reporting expenses for companies and aligning with international reporting standards to lower transparency for investors and less uniform reporting standards: The End of Quarterly Reporting in the United States? | Debevoise & Plimpton LLP.
U.S. Government Shutdown Continues: One of the impacts of the federal shutdown is that the Bureau of Labor Statistics (BLS) does not issue economic data. Last Friday, U.S. unemployment data was delayed, preventing investors and the Federal Reserve from analyzing the data and the current state of the U.S. economy. The next big data point that may be impacted is the September monthly inflation report, due out on October 15th. If inflation data is delayed, the government uses an ‘imputed’ rate until the actual data is calculated and released. This may impact inflation-linked markets, like Treasury Inflation Protected Securities (TIPS), where if the actual inflation number is different than the estimated rate, a disconnect could occur in the market. The government has already delayed the announcement of the Social Security Cost of Living increase. Federal Shutdown Cuts off Economic Data | AP News
U.S. Train Travel: In addition to data delays, the federal government shutdown is impacting air travel with staffing shortages. Before the shutdown, train travel was already rising in the U.S., with Amtrak users up 6% compared to a year earlier. Amtrak points to:
- Growing congestion on roads
- More painful airport experiences
- Population growth in cities
There is certainly more maintenance and upgrades necessary to existing tracks to increase the reliability and speed of rail travel in the U.S., but in some corridors of the U.S., it is increasingly the most comfortable way to travel: Rail Travel is Booming in America | Economist
Financial Planning/Investment Strategy Corner:
U.S. Equity Fund Flows: Morningstar tracks inflows to mutual funds and ETFs, and these charts surprised me in terms of investor behavior: Fund Investors Need to Cool It With US Stocks | Morningstar. U.S. equity funds have rewarded investors over the past 10 years as U.S. funds have outperformed all other asset classes. U.S. equity funds now make up 52% of the market share of all funds, up from 41% ten years ago. The surprising part is when you look at the inflows to asset classes in terms of investor behavior. U.S. equity market funds saw $92 billion in inflows over the previous 10 years, while taxable bond funds saw $2.8 trillion in inflows. What this means is that fund flows were not the cause of the U.S. equity fund share of assets; it was almost entirely investment performance, which added nearly $12 trillion to U.S. equity funds. It also shows behaviorally that investors did not continue to chase U.S. equity returns as they added more to fixed income throughout the 10 years than to equities. What investors should consider, if they did not actively rebalance out of the U.S. funds, their asset allocation may not align with their initial plans based on the outperformance alone. RSWA encourages investors to periodically rebalance their portfolios and accounts to maintain proper diversification and allocations.
Quick Hits:
- This was an interesting read on the thieves' tactics, and I was surprised by the street value of some rare books: The Pushkin job: Unmasking the Thieves Behind an International Rare Books Heist | The Guardian
- At RSWA, we encourage clients to review their estate plan but also their volume of books owned so as not to leave 20,000 (!) to heirs: Two Years After Cormac McCarthy's Death, Rare Access to His Personal Library Reveals the Man Behind the Myth | Smithsonian
- Jaime Dimon offers perspective on a variety of topics: Growth of AI, Jobs, Government Shutdown | YouTube
- Research finds doing almost anything is better with friends | Washington Post
- Robert Redford will live on in social media: The famous Robert Redford nod meme, courtesy of 'Jeremiah Johnson'
Quotes: “When you get older, you learn certain life lessons. You apply that wisdom, and suddenly you say, 'Hey, I've got a new lease on this thing. So, let's go.'” – Robert Redford
“There’s no reason to blot the page up with weird little marks. I mean, if you write properly, you shouldn’t have to punctuate.” – Cormac McCarthy
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