Q3 Guidance: Reading The Tea Leaves
I’m not a superstitious man. I don’t believe in astrology and I’m not a fan of fortune tellers. However, in a figurative sense, I do spend a considerable amount of time “reading the tea leaves.”
While tasseomancy, the art of tea leaf reading, is an introspective study, my reading of the financial tea leaves involves reaching out to consume publicly available hard data.
To get a better idea of the stock market’s direction for the rest of the year, let’s read the tea leaves for third-quarter corporate earnings guidance.
First, a snapshot of recent market action. On Wednesday, the main U.S. stock indices rose as follows: the Dow Jones Industrial Average +102.32 points (+0.30%), the S&P 500 +17.83 (+0.41%), and the tech-heavy NASDAQ +68.08 points (+0.47%). The small-cap Russell 2000, however, fell 13.40 (-0.60%).
In pre-market futures contracts Thursday, all four indices were trading sharply higher, as worries about the debt ceiling diminished amid signs of an imminent deal between Democrats and Republicans.
Tech leads on Q3 guidance…
For Q3 2021, the estimated year-over-year earnings per share (EPS) growth rate for the S&P 500 is 27.6%. To date, 103 S&P 500 companies have issued EPS guidance for the third quarter of 2021. This number is above the five-year average of 100.
Among those 103 companies, 47 have issued negative EPS guidance and 56 have issued positive guidance. The number of companies issuing negative guidance is well below the five-year average of 61, while the number of companies issuing positive guidance is well above the five-year average of 39.
When it comes to positive Q3 guidance, the information technology sector leads the pack.
Rising bond yields lately have taken some of the steam out of the Big Tech equity rally, because higher rates diminish the value of future earnings. But I don’t see this dynamic as a long-term threat to technology stocks and by extension the broader market.
Tech stocks are pricey but their future prospects seem to warrant elevated valuations, despite headwinds such as inflation and rising yields. Big Tech accounts for a disproportionate share of the S&P 500, so Silicon Valley’s inherent strength should continue to provide momentum for the rally.
I’ve been reading Big Tech’s obituary all year. The sector is still alive and kicking (see chart).
The number of companies issuing positive EPS guidance (27) in technology is well above the five-year average of 18 for the sector.
The tech sector has posted the fourth-largest percentage increase in estimated EPS among all 11 S&P sectors since the start of the quarter at 5.7% (to $94.1 billion from $89.1 billion). As a result, the estimated EPS growth rate for this sector has risen to 28.5% from 21.6%, from the start of Q3 to its end.
Technology companies crushed expectations for Q2 earnings and they’re expected to continue posting robust operating results for Q3 and Q4.
Fueling the tech sector’s prosperity is continual innovation, not just in work-at-home digital capabilities but also in renewable energy, biotech, virtual/augmented reality, robotics, artificial intelligence, autonomous vehicles, radio frequency identification, blockchains, orbital satellites, and the Internet of Things (IoT).
COVID has been a tailwind for technology stocks. The changes in consumer behavior wrought by the pandemic will continue to lift tech demand far into the future.
Facilitating these tech wonders is the global roll-out of 5G (fifth generation) wireless technology. As an investor, you should keep an eye on 5G. The companies developing and leveraging 5G are huge money-making opportunities. 5G provides faster and broader bandwidth than 4G.
5G will facilitate IoT by allowing several interconnected electronic devices and machines to communicate with each other instantaneously at ultra-fast speeds. Want details on how to profit from 5G? Click here for our technology report.