Apple’s earnings miss last night is being overreacted to, as almost all earnings misses by major companies lead to a violent reaction by short-term traders abandoning a stock newly bereft of near-term prospective price momentum. But there are more important issues here than a single company’s quarterly earnings miss, whether that miss is related to China as stated, or is a result of a more widespread set of influences. Perhaps the greatest risk factor facing public markets globally at this time is earnings expectations, a risk factor mostly overlooked recently. At the end of the day, stock prices over the long term are a function of earnings strength and magnitude of growth – markets have been focused on interest rates, inflation, Fed policy, oil prices, US political squabbles & instability, and trade conflicts with China, the EU, Canada and Mexico, in no particular order.
All these factors are important influencers of market direction – but stock price direction eventually falls back to earnings strength and growth – Apple may be the canary in the coal mine that investor expectations for earnings growth are misaligned with current realities. Earnings growth in 2018 was an outlier – powerful growth was driven by tax reform and lower corporate tax rates, and a newly oriented business-friendly US governmental executive branch. Tax reform gave a one time boost to the pace and percentage increase in US profit growth; the immediate positive influence of a business-friendly executive branch has been mostly realized. It seems most of the bullets in the chamber that may be fired to propel earnings growth have already been fired. If earnings growth disappoints in 2019, growing say 0-5% instead of the 6-10% year over year earnings growth expected, we may see a repricing and revaluation of US equities. One can argue we’re already seeing that. A repricing of equities would mean a larger workout of market pricing, and a longer processing of the past decade’s equity gains before we can move forward and deliver further gains to stock market investors. The rate and magnitude of US earnings growth in 1st quarter earnings reports is something to watch very closely. Investors are likely to require more patience to “stay in the game” in the next 6-24 months. The easy money has been made – the next few years will require a heartier, more disciplined, and more patient breed of investor.
