Note: I am travelling for another week. Postings may be fewer and shorter.
EARNINGS WATCH
Despite optimism about consumer prices, there are signs of pressure in the pipeline. Raw materials prices are increasing, and not just oil. The Commodity Research Board’s RIND (Raw Industrials) index, which covers industrial products that aren’t quoted on futures markets, is rising sharply, as is Bloomberg’s index of the major industrial metals:
The CRB’s RIND Index is up 9.3% YoY while major industrial metals prices are up 31.4%. These higher prices quickly boost producers profits, but they are also costs, many Hormuz-related, that eventually transit into users’ input costs. They then migrate into higher consumer prices and/or lower profit margins.
If earnings growth has been a party dominated exclusively by Big Tech, the guest list expanded in the second quarter. Nearly everyone else is joining in as tech giants relinquish their advantage. With all S&P 500 companies now having reported their earnings, non-technology groups are on course for their second-best quarter since the debut of ChatGPT in late 2022 — though they’re still far behind the remarkable overall earnings growth recorded by the Magnificent Seven leading the artificial intelligence buildout:
This is quite unmistakably a huge cyclical boom. Deutsche Bank’s Binky Chadha notes that overall S&P 500 profits growth accelerated to 34%, from 25% in the first quarter, one of the highest figures ever outside of recoveries from recessions. All sectors are on track to deliver growth, with seven of the 11 in double digits. While tech is still the lead driver, its contribution to aggregate growth is “only” 55% from about 90% a year ago.
Note that the 7/11 in double digits include tech industries (including Consumer Discretionary with AMZN’s AWS) and Energy and Materials strongly benefitting from the above.
Looking ahead, analysts estimate that ex-Tech, Energy and Materials, profits will rise 6.7%, 10.7%, 8.5% and 5.7%, on average, in each of the next 4 quarters respectively. This is 7.9% growth on average over the next 12 months. Not quite the “unmistakable huge cyclical boom”.
John then adds these important factoids:
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Even if earnings are broadening, Apollo Global Management’s Torsten Slok points out that non-tech companies’ profit margins show little evidence that they’ve yet managed to use AI to make themselves more profitable:
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Societe Generale’s Andrew Lapthorne offers another illustration of this. Nearly 90% of S&P 500 companies reported increased sales. The number improving their margins, however, was barely half that:
Time will tell how the cyclical inflation will migrate into consumer prices and/or profit margins.
John concludes:
Still, the way the market has handled these earnings is in one way exceptionally encouraging. Earnings multiples are falling. Over history, a rerating like this is almost always achieved by prices falling. This time around, earnings have grown to justify the previous generous multiples:
Investors generally pay less for cyclical profits, anticipating they can’t last very long.
The yield on 10Y Ts closed at 4.72% yesterday, up from 3.9% when the war on Iran started. Not only telling something about inflation, but also impacting P/E multiples.
China’s Teapots May Boost Iran Oil Buying as Stockpiles Dwindle
Shrinking regional oil stockpiles held by China’s independent refiners in Shandong province may spur increased buying of Iranian crude, offering Tehran a needed boost after a period of slow sales.
Inventories in Shandong — home to most of China’s so-called teapot refiners — dropped to 360 million barrels in July, the lowest level in eight months, according to data compiled by Energy Aspects. Stockpiles in the region are held by both private as well as state-run processors.
China’s teapots dialed back purchases and relied heavily on stockpiles after Beijing instructed them to maximize fuel production to help cushion the impact of the Iran war. The refiners are by far the biggest buyers of Iranian crude, typically accounting for about 90% of sales, and softening demand led to a swelling hoard of the country’s oil on tankers at sea.
Energy Aspects estimates stockpiles in Shandong declined by 35 million barrels last month, the biggest monthly draw since the consultant started compiling the figures in 2016. Across China, meanwhile, the nation’s inventories still stands at a robust level of 1.208 billion barrels as of August 6, according to Kpler estimates which includes underground strategic reserves sites. (…)
China aggressively built up its crude stockpiles last year, providing a buffer for refiners after the Iran war disrupted supplies from the Middle East. Tapping that inventory also took some demand pressure off the global market, and is one of the reasons why oil prices haven’t surged much higher. (…)
In the USA:
