With 85% of the S&P 500 components having reported earnings for the first quarter of 2024, LSEG IBES estimates that the earnings will grow 7.8% YOY on revenues that are up 3.9% YOY. This 7.8% growth rate brings the quarter’s estimate back to where it was at the start of this year and before estimates fell significantly in April. It is this downward guidance ahead of each earnings season that generates a healthy number of positive earnings surprises each quarter. There are many ways to generate a small earnings surprise which is why we do not put much weight on earnings surprises.

Apple Inc. (AAPL – $182.40), which is challenged in several of its business segments, reported its fiscal second quarter earnings last week and its results beat the Street’s modest expectations. However, revenue fell 4% to $90.8 billion and iPhone sales fell 10%. Apple reported net income of $23.64 billion, or $1.53 per share, down 2% from $24.16 billion, or $1.52 per share, in the year-earlier period.

Nevertheless, the stock surged after it announced a 4% increase in its cash dividend and authorized an additional program to buy back $110 billion of stock, the largest buyback in the company’s history. The stock climbed 7% in extended trading after this announcement.

But this response to Apple’s buyback announcement made us look at the history of Apple’s outstanding shares.* What we found was that Apple’s shares outstanding peaked at the end of the first quarter of 2013 at 26.489 billion shares. At the end of March 2024, Apple’s fiscal second quarter just announced, shares outstanding were 15.465 billion, or 42% lower. We were surprised by the extent of this decline. In other words, over the last eleven years, Apple’s earnings per share are 42% higher due to a lower denominator, not earnings growth. In the first quarter, Apple’s shares outstanding declined by 2.4%, making earnings that much higher. One could say that each share of Apple is more valuable because there are fewer shares, which is true. But it does say something about the quality of earnings, in our view. Apple is rather unique due to its cash flow and its ability to buy back shares. An investor might want to focus more on top line revenues and income, rather than on earnings per share to monitor real growth in Apple’s business.

The major leader in terms of first quarter earnings growth is currently the communications services sector where IBES forecasts earnings will rise 44% on revenue gains of nearly 7%. The communications services sector includes Meta Platforms, Inc. Class A (META – $468.24), Alphabet Inc. A (GOOGL – $171.25), Alphabet Inc. C (GOOG – $172.98), and Netflix Inc. (NFLX – $606.00).

This year to date, the S&P 500 and the Nasdaq Composite index have gained 8.8%, whereas the Dow Jones Industrial Average is up 3.2% and the Russell 2000 index is up only 1.9%. All together this suggests that despite a broadening in the rally, the bulk of the gains continue to be in the large cap technology-driven stocks.

But we also want to point out that the technical condition of the equity market has markedly improved this week. Our 25-day volume oscillator remains neutral for the fifth consecutive week; but the 10-day averages of daily new highs and new lows have gained momentum. New highs are averaging 128 and new lows are averaging 46, a combination that is now positive. In addition, the NYSE advance/decline line made an all-time high on May 7, 2024, and has now confirmed the advance. See pages 11-12.

All four of the popular equity indices have recently tested their 100-day moving averages and to date, with the exception of the Russell 2000 index, these rebounds appear successful and are in line with a normal correction. The Russell 2000 broke its 100-day moving average and tested its 200-day moving average, and despite a recent dip into its long-term neutral trading range of 1650 to 2000, the index appears to have tested this key support level successfully. In sum, the charts are positive and appear to support further gains.

It has been a busy two weeks with an FOMC meeting, a Treasury offering, inflation data, income data, and employment statistics. The next key release will be the CPI on May 15th, so it will be interesting to see how the market trades without an external stimulus to drive the daily trading.

Economic Releases

Although the job market remained solid in April, payrolls rose by 175,000, which was below expectations. Healthcare represented nearly half of the gains, while leisure/hospitality and government together added only 13,000 jobs in the month. The household survey showed modest job growth (25,000) relative to job losses (63,000) which translated into an unemployment rate of 3.9%, up 0.1%. Job growth in the establishment survey was 1.8% YOY versus the long-term average of 1.7%; however, the household survey had job growth of 0.3% YOY which was well below the long-term average of 1.5% YOY. This statistic will be important to monitor since negative job growth is a classic sign of a recession. See page 3.

Average hourly earnings for production and non-supervisory workers were up 4.0% YOY in April, down from the 4.2% YOY seen a month earlier. There has been a steady deceleration in earnings growth since the March 2022 post-pandemic peak of 7% YOY. Average weekly earnings for production and non-supervisory workers were $1005.27, down from February, but up 3.7% YOY. However, again this was a deceleration from February’s 3.9% YOY pace. See page 4.

April’s ISM nonmanufacturing index contracted for only the second time in nearly 4 years. However, both the ISM manufacturing and the ISM nonmanufacturing indices showed that prices paid rose in April (inflationary) to 60.9 in manufacturing and 59.2 in nonmanufacturing. Service industry employment fell to 45.9 and manufacturing inched higher but remained below 50 at 48.6 (contraction). See page 5.

Private residential construction spending fell 0.7% in March to $884.3 billion, reversing February’s gains, but still up 4.4% YOY. New home unit sales were up 8.3% YOY in March to 693,000 units, the best level since September 2023. However, existing home sales were 4.19 million in March, down 3.7% YOY. The price of a new single-family home rose 1.0% YOY after months of declining prices. The median price of a single-family existing home rose 4.7% YOY in March, supported by a low level of inventory. See page 6.

The existing home market is six times larger than the new home market, but sales have been slowing in both markets after the post-Covid boom. Moreover, homeownership also declined in the first quarter to 65.6% and the only area of the US with a gain in homeownership in the first quarter was the Northeast where it rose from 61.5% to 62.6%. Housing prices are rebounding, and new home sales are rising. These are good signs in an important segment of the economy. Still, many potential homeowners have already been priced out of the market. *https://www.macrotrends.net/stocks/charts/AAPL/apple/shares-outstanding#:~:text=Apple%20shares%20outstanding%20for%20the,a%203.78%25%20decline%20from%202020

Gail Dudack

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PLEASE NOTE: Unless otherwise stated, the firm and any affiliated person or entity 1) either does not own any, or owns less than 1%, of the outstanding shares of any public company mentioned, 2) does not receive, and has not within the past 12 months received, investment banking compensation or other compensation from any public company mentioned, and 3) does not expect within the next three months to receive investment banking compensation or other compensation from any public company mentioned. The firm does not currently make markets in any public securities.

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