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Better than expected earnings pushes S&P and Nasdaq to record highs

Earnings Season

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More than 140 companies published their earnings statement last week, still keeping the positive trend of the reporting season. With 46% of the companies in the S&P 500 reporting actual results for the first quarter, 77% have a positive EPS surprise and 59% have reported a positive revenue surprise.

For Q1 2019, the blended earnings decline for the S&P 500 is -2.3%, which will mark the first year-over-year decline in earnings for the index since Q2 2016 (-3.2%). However, the earnings season is quite less negative than earlier expected.

Profits at S&P 500 companies are expected to decline by 1.3% in the first quarter, in what analysts say could be the first earnings contraction since 2016. However, forecasts have largely improved since the start of April.

For the first quarter, the S&P 500 is reporting a year-over-year decline in earnings of 2.3%, but year-over-year growth in revenues of 5.1%. Given the dichotomy in growth between earnings and revenues, there are concerns about the net profit margins for S&P 500 companies in the first quarter. The blended net profit margin for the S&P 500 for Q1 2019 is 10.9%, which will mark the first year-over-year decline in the net profit margin for the index since Q4 2016 and the lowest net profit margin reported since Q4 2017

Ten of the eleven sectors are reporting a year-over-year decline in their net profit margins in Q1 2019, led by the Communication Services (11.5% vs 13.6%), Energy (4.4% vs 6.2%), and Information Technology (20.7% vs 22.3%)
sectors. The Utility sector (13.0% vs 12.8%) is the only sector reporting a year-over-year increase in its net profit margin.

The S&P and the Nasdaq surged to record highs following better than expected earnings. Twitter, Hasbro, Facebook, Lockheed Martin, Verizon, eBay, and Amazon beat forecasts driving the equity index rally to record levels. The gains highlight a momentous run for US equities which are up a staggering 25% from Christmas eve lows.

Earning season is really gathering pace and following the latest financial statement, the software giant Microsoft surpassed the threshold of 1 trillion USD market capitalization.

Amazon reported a record profit for the fourth consecutive quarter

Amazon surpassed earnings expectations in the first quarter due to the growing demand for its cloud and advertising services.

But weak forecasts by the end of the year resurrected concerns that the company will invest some of its profit into larger investments this year.

The company’s net profit for the first quarter rose more than double to a record 3.56 billion USD, or 7.00 USD per share, while analysts expected only 4.72 USD. This is the fourth consecutive quarter in which Amazon achieved a record profit.

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By contrast, the company predicts that its operating profit in the second quarter will grow to 3.6 billion USD, while analysts expect 4.2 billion USD.

The sales revenue jumped by 20% to 11.1 billion USD in the first quarter and revenue from advertising and other sales rose 34% to 2.7 billion USD after rising by at least 60% during the five previous quarters.

At the same time, Amazon Cloud Services has kept its growth rate as more companies have outsourced their computing operations and data processing to the technology company’s servers. Amazon Web Services sales rose by 41% to 7.7 billion USD in the first quarter, though this also represents a slowdown in growth from 49% last year.

The company forecasts that its net sales revenue will reach 59.5-63.5 billion USD in the second quarter, while analysts’ median forecast was for 62.37 billion USD.

The company’s total revenue rose by 16.9% on an annual basis, but this is the slowest increase since the first quarter of 2015. The net sales revenue in North America, Amazon’s largest market, rose by 17% to 35.81 billion USD in the first quarter compared to an increase of 46% in the same period last year. At the same time, international growth has reached only 9% compared to 34% in the previous year.

The company’s operating expenses rose by 12.6% to 55.28 billion USD due to investments in the manufacturer of electric cars Rivian and in the Aurora self-drive startup, as well as the continuing costs of the Prime program, the supply of groceries from Whole Foods and original video content.

Amazon also benefits from its highly profitable ad sales business. The company said revenue from this and some other categories rose by 33.7% to 2.72 billion USD, although it did not meet the expectations of 2.85 billion USD.

Facebook surpassed Wall Street’s forecast

Facebook surpassed Wall Street’s forecast for the first quarter and allocated 3 billion USD to cover the agreement with US regulators, which calmed investors worried about the development of the federal investigation for months.

The 3 billion USD deal, which could grow to 5 billion USD, cut the company’s net profit for the first quarter to 2.43 billion USD, or 0.85 USD per share.

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Excluding the amount of the deal, Facebook has earned 1.89 USD per share, over the reported 1.69 USD per share a year earlier. By this indicator, the company easily surpassed analysts’ forecast of 1.64 USD per share.

Total revenue for the first quarter rose by 26% to 15.1 billion USD from 12 billion USD last year, again surpassing the average forecast of analysts for 15 billion USD.

Monthly and daily users of Facebook’s main application increased by 8% last year to 2.4 billion and 1.6 billion respectively, according to forecasts.

Total costs in the first quarter are 11.8 billion USD, including the amount of the agreement to settle the dispute with regulators. They are 80% more than a year earlier when the company hires content moderators and invests more in defense to make the social network a more secure place.

Verizon raised its annual profit forecast despite outflow of subscribers

Verizon Communications raised its annual earnings forecast and surpassed Wall Street’s quarterly expectations after focusing on shrinking spending. At the same time, however, the largest telecom in the United States reported a high number of lost subscribers than predicted.

Verizon said it expects a low one-digit rise in adjusted earnings once it said the profit for 2019 would be similar to last year.

Verizon announced that in the first quarter it lost 44,000 subscribers who pay a monthly fee. Analysts expected the outflow to be 25,000 subscribers.

Verizon has launched its 5G mobile network in two US cities in April this year at an additional cost of 10 USD per subscribers with ongoing unlimited plans. It plans to spend 17 to 18 billion USD this year to build a new generation of the mobile network.

Verizon’s net profit for the quarter rose to 5.03 billion USD, or 1,222 USD per share, in the first quarter ended March 31. For comparison, a year earlier it was 4.55 billion USD or 1.11 USD per share.

On an adjusted basis, Verizon earned 1.20 USD per share, surpassing analysts’ estimates of 1.17 USD per share.

Total operating revenues increased by 1% to 32.12 billion USD, which was slightly below the expected 32.16 billion USD.