The following commentary originally was sent to Trifecta Stocks subscribers on Oct. 21.
We navigated through the first real week of September-quarter earnings, the third presidential debate and a host of other items, the combination of which found the market relatively unchanged. All in all, more than 300 companies reported their quarterly numbers this week, and as expected the results were rather spotty with shortfalls and misses. That's not to say it was all bad news, however, but as the velocity picked up later in the week it became evident the market is going to move based on the tone of earnings.
As of Friday (with 23% of the companies in the S&P 500 having reported 3Q 2016 earnings), 78% of S&P companies have reported earnings above the mean estimate and 65% have reported sales above the mean estimate. Leading the pack are financials and utilities, and dragging behind are energy and industrials names. Given negative pre-announcements from Honeywell (HON) and Dover (DOV) and today's results from General Electric (GE:NYSE), it's not surprising to see industrials called out. On the plus side, we have no exposure to either the industrials or energy sectors in the portfolio.
As the data show, thus far, more companies have reported better-than-expected results, helped in part by corporate buyback programs. Nevertheless, this has led to an upward move in earnings expectations for the September quarter, which now sit at -0.3% for the S&P 500 -- still in negative territory, but much better than the projected decline of 2% from just a few weeks ago. Keep in mind this is based on 23% of the 500 S&P companies, which means we have more than 75% to go over the next few weeks. Odds are we will see some more back and forth among those S&P 500 September-quarter earnings forecasts as well as some re-jiggering for the December quarter.
Next week, 178 S&P 500 companies -- roughly 36% of the index -- are scheduled to report quarterly results. It's going to be frenetic, but exiting next week (with almost 60% of the index having reported), we should have a much clearer picture on earnings growth as well as expectations for what lies ahead.
Turning to Trifecta, no portfolio companies reported earnings this week, but that will change considerably next week with seven positions -- PetMed Express (PETS) , Whirlpool (WHR) , Sherwin-Williams (SHW) AT&T (T) , Alphabet (GOOGL) , United Parcel Service (UPS) and MasterCard (MA) -- on tap to release results. Granted it's just a little over half of the portfolio's holdings, but it comes against a backdrop of more than 980 companies issuing quarterly results.
Making the start of next week even more interesting is the potential for a transaction between AT&T and Time Warner (TWX) , with the companies reported to be in advanced talks heading into the weekend. We shared our take on this Friday, and again below, but in a nutshell we like the transaction from a strategy perspective, but the devil will be in the details and purchase price.
Given the number of Trifecta positions that are reporting next week, we purposely stayed on the sidelines over the last few days as we assemble data points from those companies that did issue results and near-term outlooks.
We continue to watch those names where we have room to expand the portfolio position, including International Flavors & Fragrances (IFF) , Nike (NKE) and others, for potential opportunities among the earnings fray. In the meantime, our inverse ETF positions, which have trended higher thus far in October, and cash should help shelter the portfolio against sudden market moves to the downside.
Even though we didn't add to any positions during the week we received several favorable data points for the domestic housing market in the form of September housing starts & building permits and September existing home sales. Both led shares of Sherwin-Williams and Whirlpool higher, making them the top portfolio performers for the week. Rounding out our top performers was Alphabet and we've boosted our price target to $975 from $900. Meanwhile, with the drift lower in United Parcel Service this week, we've upped UPS's rating back to One from Two.
Looking ahead to next week, we've got a bunch of economic data on tap including including September new home sales and the durable orders report for September. We'll also get the October Flash PMI reports for manufacturing and services, with both hitting the tape ahead of Friday's first reading on GDP for 3Q 2016. What this means is after a relatively quiet five with regard to what the Fed may or may not due in December, that conversation will resume next week.
We'll continue to follow the data, letting it speak to us and be our north star for the coming weeks instead of twisting the data to validate what we want it to say. As we do, we will continue to scale selectively into existing positions while looking to pick off new ones, too.
