Market Insights

Last earnings season was a tough act to follow, but Corporate America is about to give it a try.

Per-share profits climbed about 25 percent and revenue rose approximately 10 percent. Both of those gains were the best since the start of the decade.

Early indications for the third quarter are weaker. Earnings growth is expected to slow to the 19-20 percent range, and revenue estimates have been ticking down closer to 7 percent. Number-crunchers at FactSet say the prospects have dimmed recently, with the most companies issuing negative guidance in about two years.

Still, investors shouldn’t lose sight of the fact that we’re in the midst of a big upswing in corporate finances. It started in the fourth quarter of 2017 and has lasted for all of 2018. Next year, analysts are looking for a dip back down to single-digit growth.

Beyond just the raw numbers, a few patterns emerged at the company and industry level last earnings season. Investors may want to bear them in mind as the next set of numbers trickles out.

First, some firms are reinventing themselves as the digital economy continues to take shape. Apple (AAPL) is a key example by focusing on service businesses with stickier revenues. Investors are usually willing to pay higher multiples for businesses like that.

Cisco Systems (CSCO) is trying to follow a similar path by shifting to cybersecurity services over hardware.

Digital transformation also emerged as a narrative in the retail space. Companies adapting to the new world of e-commerce have gotten rewarded, while those still dependent on brick-and-mortar locations got punished. Based on my review of all the companies, I’d venture to identify the following companies as the “Four Horsemen of the Retail Post-Apocalypse”:

1. Target (TGT): The big-box retailer beat estimates across the board and raised guidance. It’s embracing change with its Shipt delivery service and revamped stores, plus new fashion brands for millennials.
2. Wal-Mart Stores (WMT): Aggressive e-commerce growth is offsetting mediocre store traffic. More recently there’s been a focus on grocery, and its lower-income shoppers have benefited most from the current economic rebound.
3. Nordstrom (JWN): The higher-end retailer made an aggressive and successful push into e-commerce. That allowed management to raise guidance and squeeze bears who were short the stock.
4. Lululemon Athletica (LULU): The yoga company has been on a roll as management successfully defends its market position and kick starts growth. Now it’s also expanding away from its traditional woman shoppers to men.

Getting back to technology, last quarter brought two bearish trends.

The first was slowing growth at big Internet stocks. Facebook (FB) was the biggest culprit, resulting in its biggest drop ever. (And the shares have yet to recover.) Twitter (TWTR) and, to a lesser extent, Netflix (NFLX) had similar issues.

Traders may also want to keep an eye on Alphabet (GOOGL). Even though the search giant beat expectations last quarter, it’s faced criticism over anti-trust and data-privacy. Perhaps even worse, Amazon.com (AMZN) is starting to challenge its Golden Goose advertising business.

Semiconductors are the second weak spot in technology. They’ve underperformed the broader Nasdaq-100 and technology sector by a wide margin since the spring on signs of slowing business.

In conclusion, today’s the first big day of third-quarter earnings season. Attention is focused on financials but plenty more stories will be playing out in the next few weeks.