The most recent quarterly earnings results have been better than many have expected. But with stock markets remaining volatile, what can investors expect going forward? Kim Parlee speaks with Ben Gossack, Portfolio Manager, TD Active Global Enhanced Dividend ETF.
- Hello, and welcome to the show. It is great to have you with us. Just as investors get used to calmer waters in the markets, the Dow Jones Industrial suffers the biggest fall since January as trade wars rear their ugly head again. Here with his take on what investors should look for as well as the biggest stories this earnings season is Ben Gossack. He's Portfolio Manager of the TD Active Global Enhanced Dividend ETF, and it is great to have you here.
- Thanks for having me back.
- Yeah, and I wanted to put the earnings before we get there, tweets, tariffs. Trump, it all begins again.
- Yeah, you could look at it a couple of ways. The market's been up about 23% since the bottom in December. And so since Trump's tweets, we're only down about 2%. So I mean, we're due for a little bit of pullback, but we've talked many times on your show about the world or investors looking at the world in a glass half full, glass half empty lens, and it's very easy to focus on the glass half empty. And the three things that were bothering the market was a maturing economic cycle, trade uncertainty, and the Federal Reserve.
And so I'd say since December where we sort of resolved some trade uncertainty that we'd get a framework. The Fed has moved to the sidelines. And we do have a mature economic cycle, but we don't have anything that's approaching deceleration. And so Trump's trade tweets remind us that there was a bit of expectation that we were getting closer to a framework, and that might be a little bit ways off.
- Yeah. We got some news, of course, in China now saying countermeasures-- and we'll see-- but again, we're near the deadline. This always happens near the deadline. So you have to watch this stuff.
I know one thing, though, that what happens, of course, is the politics make the headlines. But in the meantime, we've had an earnings season that's come out. So I want to get your take just on how those earnings were looking overall because I think the bar was actually pretty low going into this, wasn't it?
- Yeah, so all this tweeting about tariffs overshadowed actually what's been a really good earnings season. I think we need to put this in context. So revenue grew about 2%, and earnings per share grew about 2% as well. And you'd say that's-- those don't seem like really big numbers. But we're comping quarters that had a revenue growth of 8% and earnings per share growth of 26%.
Now some of that came from the tax-- sorry, the tax reduction, but you're looking at about 18% core growth. So we're due for a bit of slowing just because we're comping big numbers. But they have come out well ahead of expectations, and there's a couple of sectors that have been interesting highlights.
- Let's run through some. Technology is always one, of course, that's been leading the markets for so long. What did we see out of the tech companies?
- Yeah, so tech's really important. It's the biggest sector. I think we saw two different speeds. So if you break it down into software, software companies. If you think about Microsoft, Salesforce, Service Now have done really well.
What's held back the technology sector has been hardware. And we say hardware, we're on a back end of a slower iPhone cycle, so Apple coming out, revenue down five, earnings per share down 10 doesn't seem too terrible. But that's the second largest stock in the index, so it does weigh down on the market.
And then we've talked about this about a semi cycle. So we've had a slowdown since the summer of last year. And so that's playing it's way through, and we're looking for about a bottoming very soon.
- How did-- if you look at media comms, I guess-- I want to get to Google. Does Google-- is Google a media comms company? Is that how we classify it?
- Yeah, so under the new reclassification, Google, Facebook, AT&T, Verizon, Comcast, and Disney are all in one little sector. I'd say interesting reaction to Google. So if I told you that Google put up 19% revenue growth given the amount of revenue that they generate, the billions and billions of dollars, you'd say that be pretty good.
But this is the first quarter in several years that that revenue growth wasn't above 20%, and so that was a bit of a surprise for a lot of investors. And so that stock was down about 8%. But going through their earnings they didn't seem to be anything about a deterioration in the business.
On the flip side, Facebook was up about 6%, and so they had telegraphed that they would see revenue and earnings slow because they're changing their communication model. Rather than public posts, more of a private communication between people. But what was surprising about Facebook was the resilience of the people that go on that platform. So given all the headlines and worries about fines, the monthly activity was up about 8%. And so that's why the stocks are improved.
- Inertia. People are there. They don't want to move. I think that always speaks for a lot. Industrials, 3M not so great.
- Yeah, so it's funny. So 3M, a big bellwether, down 13%. You say maybe this isn't such a good earnings season. And so 3M sales to everybody, but it overshadows what actually was really good earnings and industrials. So if you look at aerospace companies, you look at the rails, you look at defense, all had really good quarters.
What 3M has that's different than the other industrials is a bit more tied to shorter cycles. And so when they say automotive was slowing down, when they say that electronic manufacturing, it's almost coincident with the data that we see. So it doesn't mean that there's anything in particularly bad that's going on. It's just it's closer to shorter cycle.
- Got it.
- I'd say the sector that is the biggest surprise to me is health care. Health care stocks are up about 5% on revenue. They grew their margins. They grew their earnings per share about 10%. You think that the market would reward health care stocks, but given the sentiment that's going on right now in terms of the upcoming 2020 US presidential elections, health care is actually the stock that's lagged the most on a relative basis.
- We've got a chart here we can show where we go from here, and you've got to look at the leading I'd say transitioning and lagging sectors and what happened for the first quarter. But I mean looking ahead how do things look?
- Yeah, so on a valuation basis, the stock market's trading about 15 times 2020 earnings. And we're trading near highs. And so what's leading the market is the tech sector and then funny enough utilities and REITs. They don't typically go hand in hand. But when a very lower interest rate environment and so utilities and REITs tend to do better.
But the way I like to think about in terms of leading, leading relative to the market high that we saw in September and the market high that we saw in February. Transitioning means they're doing better than the market high that we saw in September, but they still haven't surpassed their market highs in March. But that's communications and staples are storied moving through.
I think what really gets this market going beyond 2,900-- again looking past the tariff noise that we see this week is cyclical sectors like financials industrials that still haven't cleared their September highs or their march highs. US large cap banks reported they put up pretty good numbers. JP Morgan's starting to push a little higher, so that will start to move things and then industrials as well. It'd be good to see this stocks move higher. And that should keep the market going even higher than where it is now.