I am reasonably confident that had we been in a ‘normal’ market environment, the modest revenue ‘misses’ from Amazon (AMZN – Free Report) , Google’s parent Alphabet (GOOGL – Free Report) and a number of other major players would have been shrugged off. After all, it is not every day that the market gets to see companies the size of Amazon and Alphabet to be able to come out with quarterly revenue growth rates of +29.3% and +21.9%, respectively. But these are not ‘normal’ times.
We are going through a phase when the market is grappling with its collective outlook for the duration of the current economic cycle, both here in the U.S. as well as internationally. We need this context to appreciate the market’s ‘disappointment’ with Amazon even though it was able to grow its top-line by +29.3% from the same period last year to $56.6 billion.
Beyond Amazon and Alphabet, Q3 earnings results show that companies have been struggling to beat consensus revenue estimates. With Q3 results from almost 48% of the S&P 500 members already out, as of Friday, October 26th, the proportion of companies beating revenue estimates is the lowest since the fourth quarter of 2016, as you can see in the chart below.
The issue is bigger than companies’ inability to beat consensus revenue estimates; it is more about less than reassuring guidance and outlook for the current and coming quarters. But this weakness on the revenue and guidance fronts feeds into the narrative of skepticism about the longevity or staying power of the current economic cycle. The market is even more disappointed with Amazon and Alphabet as it sees these and other companies like them to have less of the type of cyclical exposure that ‘afflicts’ the likes of Caterpillar (CAT – Free Report) and 3M (MMM – Free Report) and other old-economy companies.
These are all legitimate concerns, but we know that markets tend to overshoot, in both directions. Take a look at the 5-year valuation chart for the S&P 500 index below.
