As we approach another record quarter for corporate profits, it's fair for investors to wonder if growth could be peaking soon -- or if it already has.
Two certain facts will help frame the question...
First, the Technology sector which has led earnings growth will very likely have reached a peak with Q4 2017 registering a 24% year-over-year advance.
The coming quarters for Tech are still impressive, but it's the rate of change in y-o-y "comps" that gets harder to come by (chart below with y-o-y comparables).
Second, the overall broad market, via the S&P 500 index, looks poised to deliver solid growth right into Q3. The comps don't get meaningfully tougher there until next year.
What's pivotal in my investing is to understand what I have called the Technology Super Cycle (link is to my special report for Zacks Confidential from December). This is the environment in which new industries in mobile, the cloud, automation and AI are driving demand and capital investment.
While analysts have been continuously calling for the top in the Semiconductor cycle for the past 3 years, I have been urging investors to pay attention to the growth in companies like Broadcom (AVGO), Lam Research (LRCX), Apple (AAPL), and NVIDIA (NVDA).
When you listen to the conference calls from these companies, you don't hear anything about falling demand. Even the highly cyclical business of computer DRAM and flash memory continues to see demand outstrip supply and that's why I recently bought Micron (MU) in the low $50s.
Here are the graphs that tell these stories...
Technology, the Great Earnings Machine
Tax Reform Lifts Many Boats: Total S&P 500 EPS Growth
At Zacks, we are most focused on Wall Street analyst Earnings Estimate Revisions (EER) because they tell growth's direction and magnitude of change.
And I especially like to look ahead a quarter or two to give me an idea about when institutional investors might be looking to lighten their load of stocks. Since they have large positions, they need time to sell and they prefer to sell into strength -- in essence, before the growth peaks have arrived and everyone can see it.
The other component I like to look at are the broad currents of the underlying economy. That piece of the foundation comes next.
What About Economic Growth -- Is It Going to Peak?
I saw a noteworthy GDP stat the other day from Darius Dale, managing director of the research team at Hedgeye: Q1 2018 GDP will mark 7 consecutive quarters of accelerating y-o-y growth, matching the longest streak since 1948, which occurred out of the 1991 recession.
I was very curious about this stat so I went to FRED, the Federal Reserve Economic Data research website to find the data and build my own chart. Here's the post I put on Twitter Friday morning...
That first link to the live chart on FRED should still work if you want to go there and hover over the data and see each quarter, going back to 1948. But I reproduce the static view below to point out how this data is evidence of a critical theme in this economic expansion and bull market.
The green ellipse on the left circles the 7 quarters of consecutive GDP growth coming out of the 1991 recession. The one on the right is where we are now, with 1Q18 yet to show us its sterling advance to best 4Q17's final number of +2.6%.
What stands out to me is the slow and steady climb since the Energy-led earnings recession of 2015-16.
This is a key observation about this entire recovery and expansion. Here was my second Twitter post on the matter...
Peak Growth = Lower Returns
These are important data series to watch. If the economy and earnings have peaked/are peaking and are due to head steadily lower, stocks will be sold en masse by institutional investors.
This is the risk of investing late in a cycle when interest rates are on the rise, big tax reform is already priced-in, and valuations are in the upper third of historical averages.
The current expansion has already lasted 105 months (since June of 2009) and is about to become the second-longest in U.S. history in 33 business cycles going back to 1854. Right now, only the expansions from March 1991 to March 2001 (120 months) and from February 1961 to December 1969 (106 months) were longer.
Cooker's Bottom Line: I'm not worried about valuations because they are not yet extreme and supported by the growth outlook, peaking or not. I think we've got the economy and earnings on our side to stay invested the rest of this year -- especially if capital investment in Technology stays strong.
But it's also time to be tactical in your buys and sells. The gift of volatility in the weakest six-month period every four years (the dreaded mid-term elections) is that you can still "buy the dips and sell the rips" in your favorite top-ranked stocks.
Disclosure: I own shares of AAPL and MU for the Zacks TAZR Trader portfolio and after I recently took some profits in LRCX and NVDA, I could be back in them at any time.
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader service.
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