Investment Insights: Earnings are ripe and Tesla smells musky

Wade Balliet
Posted by Wade Balliet
Investment Strategy

This weekly report presents insights from our Global Investment Management team.

Stock markets are nearing all-time highs again as the surge in earnings continues. The S&P 500 Index climbed to 2,858 yesterday, just shy of its highest-recorded level in January. Profits continue to be the key driver of this leg upward for stocks with what may be one of the best earnings seasons on record. Of the 444 companies within the S&P 500 that have reported, around 84% have beat analyst expectations – if it holds, this will be the best quarter since Bloomberg began tracking positive surprise data in 1993. Despite fairly aggressive Wall Street estimates due to sizeable corporate tax cuts and a stronger consumer, companies have still managed to handedly exceed estimates by an average of 5.49%, according to data aggregated by Bloomberg, while profits have grown quarter-over-quarter by over 25%! Only a handful of companies still need to report and the second-quarter season will come to a close next week.Black Tesla Model S electric car at a Tesla supercharger changing station.

Oil prices rose over the last few days as the Trump administration announced sanctions against Iran on Monday. Just 90 days after withdrawing from the nuclear deal, the U.S. has implemented measures to block purchases of Iran’s debt, restrict the trade of materials and goods, and bar the sale of U.S. currency to Iran. A second phase of sanctions will go into effect on November 5, which will likely target cutting off Iran’s oil exports. The move makes it readily apparent that the U.S. government is looking to completely renegotiate the Iran nuclear deal and is willing to apply pressure to do so. President Trump also warned any countries trading with Iran may be pulled into the diplomatic brawl.

Elon Musk made a splash within financial markets by tweeting that he may attempt to take Tesla private. Musk currently owns about 20% of the company, but securing the capital needed to take Tesla off the public market might be difficult given the company’s notorious cash flow problems. With current shares trading around $370, the market cap of the company is approximately $63 billion. Despite Musk stating a purchase price with a notable premium from current levels, he would still need over $51 billion to fund the privatization of the company. The most logical source of funding of this size would be sovereign funds and other strategic investors as the company would be hard pressed to find these levels in the debt market given the current income sheet fundamentals. However, Musk’s tweet proclaiming “funding is secured” is raising eyebrows and investors will have to wait and see until further details are announced.

Stocks have started to get some additional traction in the United States, as we had forecasted, on the back of solid earnings that had been previously overshadowed by trade war fears and other geopolitical strife across the globe. Worries are still abundant with the Fed raising rates, China’s economy slipping a bit, and oil starting to creep upward on the back of political tensions. The tremendous growth number reported here in the United States is more than likely a head or a shoulder at the end of a very long recovery. Consumers and corporations should still be relatively well off for now, and there is no reason why equity prices can’t creep higher in the interim. We will be watching the Fed’s rate increases, as well as inflation expectations here and abroad for any significant tightening in financial conditions, which may be the potential catalyst for further volatility.

Market returns from Bloomberg as of 8-7-18

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