Corporate America continues to deliver strong revenue and earnings growth in 2018. Yet, there’s a disconnect between operational and stock performance. Kim Parlee speaks with Ben Gossack, Portfolio Manager, TD Asset Management, about this disconnect and what could make market sentiment turn.
Yes. We were at market highs in the summer. But October and November have been interesting, volatile months, and so we've pulled back. If you go-- we just finished Q3 earnings. And what lifted the market to the highs were Q2 earnings, which were really good, getting that 25%, 26% earnings growth.
What's really interesting is that the earnings that have recapped this quarter are even better than what we were getting in Q2. In fact, Q1 was supposed to be the high watermark, but we got--
They keep notching up.
Right. We got revenue growth of 8%, so there's real demand. And then we had margin expansion. And then that led to about 28% earnings growth. Now, 8% of that comes from the benefit of tax gains. But 20% earnings growth is very robust. Something to be happy about, something for the market to move on that. And if anything, unless you delivered really perfect results, there was a negative reaction in the market.
So what's going on there then? I mean, is that-- actually, we'll get into what's going on, in terms of where things are going. But you've got a chart here that shows how bullish or bearish people are about the markets right now. Let's bring that up. Just connect that will be, in terms of-- because there's-- it just seems like a fundamental disconnect. Great earnings, poor stock reaction.
Right. And so underlying performance of the economy has been good. That's transmitted through the stocks. What we're looking at here-- and it's a bit of a noisy chart. But this is a survey from the American Association of Individual Investors, and it's a ratio of how many people are bullish to bearish. So what I care about when I look at are the extremes.
So back in January of this year, when the market was racing up 8%, 10% in that one month, the indicator was at 4, which means for every one bear, there were four bulls. And that's a bit unsustainable, and we saw the pullback and the reaction in February. And what really strikes me today is just how much negative sentiment there is in the market. So we're at 0.5, and that means for every bull, there's two bears. At that 0.5 has been that extreme low, even going back to the financial crisis back in '08, '09. So there's extreme negative sentiment, and I think sometimes we forget, and we think about mutual funds owning a lot of stocks, or hedge funds. But individual investors own almost about 1/3 of the US market.
So this typically has been used as a contrarian indicator. As people get way too bearish, then all the negativity has been priced in, and what we're not pricing in is any positivity.
Let's talk a bit about some of the good and bad news you think-- and some of that positivity.
You have a list here-- it's a long list, I'll warn people-- in terms of what are some of the, quote, "bad things" that are coming in the next little while, and some of the good things. And I will preface this by saying we bring this up-- they're not all equally weighted.
It's more just to let people know you really got to look at everything. And I apologize. We don't have a chart. We're just going to run through a lot. So let's go through-- so just tell me through some of the bad things.
Sure. I mean, we're getting to the point now where there's so many things to be concerned about that it's just-- I don't want this exposure, and it comes from tariffs, it comes from trade negotiations, it comes from slowdown in China. I think the biggest takeaway is how good last year was. We talked a lot about global synchronized growth. I doubt we've been-- I don't think you've heard that a lot this year.
And so, when you compare this year to last year, we have a slowdown in the automotive sector. You've seen the announcement from GM, in terms of closing plants. We've been watching a cyclical slowdown in semiconductors that started in the summer. And then, we get chatter now about a smartphone slowdown with Apple.
There's a whole magnitude. There are people that are worried, because earnings were so good this year, that we've hit the peak. Margins have to contract. And then we've had a pullback in energy. So there's a lot of things that say, oh, my goodness, these are bad things.
Let me add in here because I've got the list in front of me. You said the Italy budget, Turkey financial stress, end of QE, Mexican leadership change, a semiconductor cycle slowdown, which of course, related to the phones. Hyperscale data center overbuild. I mean, there's a lot of things you could jump on here.
Right. But I mean, it's very easy, I think, as humans, to list the negative stuff. And I think you could see I have more negative things than positive things. But it's not a scale. One of the things that we don't appreciate is the multiplier from good effects. So one really good example is how well set up the US consumer is. And we see that with the numbers that we're getting out of Good Friday, Cyber Monday.
Cyber Monday turned out to be one of the biggest buying days of the year, and we're seeing a consumer that's set up well, in terms of their balance sheet. And there's still more buying that they have to do for the rest of the season. And they're getting a benefit from a lower oil price. That means a lower gasoline price. So there's more in each person's wallet to then spend, and the US economy is predominantly driven by consumption.
Can I ask you some of these other good things? Strong labor market.
Yeah. That's a positive.
And people are working, and there are still people coming into the workforce.
Solid earnings, we talk about. Margins as impacted from investments, productivity gains in years?
Right. So people have been concerned about this peak margin because we're at a very tight labor market, and that wages have been going up, and that's been affecting margins. And that's partially true. But we also have this digital transformation, and companies need to invest in order to stay up, be competitive. And so we should see those gains from those investments in 2020, 2021. So these margins might be peaking or contracting, but they're for good reasons, as opposed to just they have to pay their employees more, and that's an impact to profits.
All right. Well, we're going to leave it there, but great to just, to your point, take a breath. And when you see the news, just understand the balance that's there. And there's a lot of good things out there, it sounds like, that are coming in the next year.
And valuations also remain supportive, given these pullbacks.
Ben, always a pleasure. Thanks so much.
Thanks for having me.